Doing Business Guide in Mongolia 2012 - 2013 · FOREIGN INVESTMENT.....19 3.1 Foreign Investment ... Mongolia is a landlocked country in East and Central Asia. It borders Russia to

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Doing Business Guidein Mongolia

2012 - 2013



2012 - 2013



2012 - 2013

Doing Business Guide 2012 - 2013

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CONTENTS

KEY STATISTICS .............................................................................................................................51. MONGOLIA – APROFILE.....................................................................................................6

1.1 Introduction .................................................................................................61.2 Government structure..................................................................................81.3 Legal System ................................................................................................91.4 People ..........................................................................................................91.5 Economy ....................................................................................................111.6 Foreign Trade ............................................................................................131.7 Mining in Mongolia....................................................................................13

2. BUSINESS ENVIRONMENT ........................................................................................... 152.1 Business Climate ........................................................................................152.2. Free Trade Zones ......................................................................................162.3 International Agreements..........................................................................162.4 Legal Environment ....................................................................................162.6 Property Market ........................................................................................18

3. FOREIGN INVESTMENT................................................................................................... 193.1 Foreign Investment....................................................................................19

4. BANKING AND FINANCE ................................................................................................ 204.1 Banking System .........................................................................................204.2 Foreign Currency Market and Foreign Currency Rules .............................214.3 Investment Institutions .............................................................................214.4 Capital Markets .........................................................................................214.5 Insurance...................................................................................................21

5. IMPORTING AND EXPORTING .................................................................................. 235.1 Trends in Customs Policy ...........................................................................235.2 Import Restrictions ...................................................................................235.3 Customs Duties..........................................................................................235.4 Temporary Import Relief ...........................................................................245.5 Customs Duties Incentives.........................................................................245.7 Warehousing and Storage ..........................................................................25

6. BUSINESS ENTITIES........................................................................................................... 256.1 Legal Framework .......................................................................................256.2 Joint Stock Company (JSC) .......................................................................266.3 Limited Liability Companies (LLC) ...........................................................276.4 Partnerships ..............................................................................................296.5 Representative Offices ...............................................................................296.6 Registration Process in General.................................................................29

7. LABOUR RELATIONS AND SOCIAL SECURITY ............................................ 307.1 Labour Market ...........................................................................................307.2 Labour Relations .......................................................................................307.3 Working Conditions...................................................................................307.4 Social Security System ...............................................................................307.5 Foreign Personnel......................................................................................30

8. ACCOUNTING AND AUDIT REQUIREMENTS ................................................ 318.1 Accounting.................................................................................................31


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8.2 Chart of Accounts ......................................................................................318.3 Audit Requirements ..................................................................................329.1 Tax System.................................................................................................329.2 Direct and Indirect Tax Burden .................................................................329.3 Principal Taxes ..........................................................................................329.4 Legislative Framework ..............................................................................329.5 Income Tax ................................................................................................339.6 Tax Treaties ...............................................................................................339.7 Tax Returns and Payments ........................................................................339.8 Assessments ..............................................................................................339.9 Appeals......................................................................................................339.10 Withholding Taxes...................................................................................349.11 Tax Audits ................................................................................................349.12 Penalties ..................................................................................................349.13 Advance Tax Clarification ........................................................................34

10 TAXATION OF CORPORATIONS............................................................................... 3410.1 Corporate Tax System ..............................................................................3410.2 Incentives ................................................................................................3510.3 Taxable Income .......................................................................................3510.4 Deductibility of Expenses ........................................................................3510.5 Related Party Transactions ......................................................................3610.6 Foreign Exchange ....................................................................................3610.8 Tax Computations ...................................................................................3610.9 Other Taxes .............................................................................................3710.10 Branch Versus Subsidiary ......................................................................3810.11 Group Taxation.......................................................................................3810.12 Special Taxation Regimes.......................................................................38

11. TAXATION OF INDIVIDUALS .................................................................................... 3911.1 Territoriality and Residence......................................................................3911.2 Gross Income ...........................................................................................3911.3 Deductions ...............................................................................................3911.4 Tax Credits ...............................................................................................4011.5 Other Taxes ..............................................................................................4011.6 Tax Administration ..................................................................................4011.7 Tax Rates ..................................................................................................41

12. VALUE ADDED TAX (VAT)........................................................................................... 4112.1 Introduction .............................................................................................4112.2 Scope of VAT............................................................................................4212.3 Zero-Rating..............................................................................................4212.4 Exempt Supplies ......................................................................................4312.5 Taxable Amount .......................................................................................4412.6 Non-Deductible Input VAT ......................................................................4412.7 VAT Incentives .........................................................................................4512.8 VAT Simplification...................................................................................4512.9 VAT Compliance ......................................................................................45

PRICEWATERHOUSECOOPERS IN MONGOLIA ............................................... 32


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APPENDIX A - MACROECONOMIC INDICATORS OF MONGOLIA ...... 47APPENDIX B – TIPS FOR BUSINESS VISITORS................................................. 48APPENDIX C – TAX RATES.................................................................................................. 56APPENDIX D – DOUBLE TAX TREATIES ................................................................. 57


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KEY STATISTICS

Mongolia

Total Area: 1,564,116 sq. km

Estimated Population: 2,800, 100 (August 2012)

Capital: Ulaanbaatar

Languages:Mongolian (official language),Kazakh (in some parts of Mongolia)

Neighboring States: Russia and China

Currency: Mongol Tugrik (MNT)

Exchange Rate: MNT 1,356= USD 1 (1 August 2012)


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1. MONGOLIA – APROFILE

1.1 Introduction

Geography and Climate

Mongolia is a landlocked country in East and Central Asia. It borders Russia to the north andthe People's Republic of China to the south, east and west. Although Mongolia does not sharea border with Kazakhstan, its western-most point is only 38 kilometers (24 mi) fromKazakhstan's eastern tip.

At 1,564,116 square kilometers (603,909 sq mi), Mongolia is the 19th largest and the mostsparsely populated independent country in the world, with a population of around 2.8 millionpeople. It is also the world's second-largest landlocked country after Kazakhstan. The countrycontains very little arable land, as much of its area is covered by steppes, with mountains tothe north and west and the Gobi Desert to the south.

The geography of Mongolia is varied with the Gobi Desert to the south and with cold andmountainous regions to the north and west. Much of Mongolia consists of steppes. Thehighest point in Mongolia is the Khuiten Peak in the Tavan bogd massif in the far west at4,374 m (14,350 ft). The basin of the lake Uvs Nuur, shared with Tuva Republic in Russia, is anatural World Heritage Site. Most of the country is hot in the summer and extremely cold inthe winter, with January averages dropping as low as −30 °C (−22.0 °F).

The country is also subject to occasional harsh climatic conditions known as zud. Ulaanbaatarhas the lowest average temperature of any national capital in the world. Mongolia is high,cold, and windy. It has an extreme continental climate with long, cold winters and shortsummers, during which most of its annual precipitation falls. The country averages 257cloudless days a year, and it is usually at the center of a region of high atmospheric pressure.Precipitation is highest in the north (average of 200 to 350 millimeters (7.9 to 13.8 in) peryear) and lowest in the south, which receives 100 to 200 millimeters (3.9 to 7.9 in) annually.The extreme south is the Gobi, some regions of which receive no precipitation at all in mostyears.

The name "Gobi" is a Mongol term for a desert steppe, which usually refers to a category ofarid rangeland with insufficient vegetation to support marmots but with enough to supportcamels. Mongols distinguish Gobi from desert proper, although the distinction is not alwaysapparent to outsiders unfamiliar with the Mongolian landscape. Gobi rangelands are fragileand are easily destroyed by overgrazing, which results in expansion of the true desert, a stonywaste where not even Bactrian camels can survive.

History

Important prehistoric sites are the Paleolithic cave drawings of the Khoid Tsenkheriin Agui(Northern Cave of Blue) in Khovd Province and the Tsagaan Agui (White Cave) inBayankhongor Province. A Neolithic farming settlement has been found in Dornod Province.Contemporary findings from western Mongolia include only temporary encampments ofhunters and fishers. The population during the Copper Age has been described aspaleomongolid in the East of what is now Mongolia, and as europid in the West.

In the second millennium B.C, during the Bronze Age, western Mongolia was under theinfluence of the Karasuk culture. Deer stones and the omnipresent keregsurens (smallkurgans) probably are from this era; other theories date the deer stones as 7th or 8thcenturies BCE. A vast iron-age burial complex from the 5th-3rd century, later also used by theXiongnu, has been unearthed near Ulaangom.


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Mongolia, since prehistoric times, has been inhabited by nomads who, from time to time,formed great confederations that rose to prominence. The first of these, the Xiongnu, werebrought together to form a confederation by Modun Shanyu in 209 BC. Soon they emerged asthe greatest threat to the Qin Dynasty, forcing the latter to construct the Great Wall of China,itself being guarded by up to almost 300,000 soldiers during Marshal Meng Tian's tenure, asa means of defense against the destructive Xiongnu raids.

After the decline of the Xiongnu, the Rouran, a close relative of the Mongols, came to powerbefore being defeated by the Gokturks, who then dominated Mongolia for centuries. Duringthe 7th and 8th centuries, they were succeeded by Uyghurs and then by the Khitans andJurchens. By the 10th century, the country was divided into numerous tribes linked throughtransient alliances and involved in the old patterns of internal strife.

In the chaos of the late 12th century, a chieftain named Temuujin finally succeeded in unitingthe Mongol tribes between Manchuria and the Altai Mountains. In 1206, he took the titleGenghis Khan, and waged a series of military campaigns - renowned for their brutality andferocity - sweeping through much of Asia, and forming the Mongol Empire, the largestcontiguous land empire in world history. Under his successors it stretched from present-dayPoland in the west to Korea in the east, and from Siberia in the north to the Gulf of Oman andVietnam in the south, covering some 33,000,000 square kilometers (13,000,000 sq mi) (22%of Earth's total land area) and having a population of over 100 million people.

After Genghis Khan's death, the empire was subdivided into four kingdoms or Khanates whicheventually became quasi-independent after Mongke’s death in 1259. One of the khanates, the"Great Khaanate", consisting of the Mongol homeland and China, became the Yuan Dynastyunder Kublai Khan, the grandson of Genghis Khan. He set up his capital in present dayBeijing but after more than a century of power, the Yuan was replaced by the Ming Dynasty in1368, with the Mongol court fleeing to the north. As the Ming armies pursued the Mongolsinto their homeland, they successfully sacked and destroyed the Mongol capital Karakorumamong other cities, wiping out the cultural progress that was achieved during the imperialperiod and thus throwing Mongolia back to anarchy.

The Mongols returned to their earlier pattern of constant internal conflict and occasionalraids on the Chinese borderlands. In the 16th and 17th centuries, Mongolia came under theinfluence of Tibetan Buddhism. At the end of the 17th century, most of Mongolia had beenincorporated into the area ruled by the Qing Dynasty. During the collapse of the Qing Dynastyin 1911, Mongolia declared independence, but had to struggle until 1921 to firmly establish de-facto independence from the Republic of China, and until 1945 to gain internationalrecognition.

Mongolia subsequently came under strong Russian and Soviet influence; in 1924, theMongolian People's Republic was declared, and Mongolian politics began to follow the samepatterns as the Soviet politics of the time. After the breakdown of communist regimes inEastern Europe in late 1989, Mongolia saw its own Democratic Revolution in early 1990,which led to a multi-party system, a new constitution in 1992, and the (rather rough)transition to a market economy.


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1.2 Government structure

Overview1

Mongolia is a parliamentary republic. The parliament is elected by the people and in turnelects the government. The president is elected directly. Mongolia's constitution guaranteesfreedom of expression, religion, and others rights. Mongolia has a number of political parties,the biggest ones being the Mongolian People’s Party (former Mongolian People’sRevolutionary Party) and the Democratic Party (DP). Mongolian politics can be turbulent,with frequent changes in cabinet members and coalition partners.

The President2

Mongolia's president has a largely symbolic role, but can block the Parliament's decisionsthrough veto powers, which requires a two-thirds majority of parliament to override.Mongolia's constitution provides three requirements for taking office as president; thecandidate must be a native-born Mongolian, be at least 45 years of age, and have resided inMongolia for five years prior to taking office. The president is also required to formally resignhis or her party membership.

The State Great Khural – the Parliament3

Mongolia uses a unicameral parliamentary system in which the president has a symbolic roleand the government exercises executive power. The legislative arm, the State Great Khural,has one chamber with 76 seats and is chaired by the speaker of the Parliament. It elects itsmembers every four years by general elections.

Prime Minister and the Cabinet4

The Prime Minister of Mongolia is appointed by the State Great Khural. The ministers of eachof the Ministries constitute the prime minister's cabinet. The cabinet is nominated by theprime minister in consultation with the president and appointed by the State Great Khural.

Recent Politics

The MPP (former MPRP) formed the government of the country from 1921 to 1996 (until 1990in a one-party system) and from 2000 to 2004. From 2004 to 2006, it was part of a coalitionwith the DP and two other parties, and between 2006 and 2012 it was the dominant party intwo further coalitions. The DP was the dominant force in the ruling coalition between 1996and 2000, and also an approximately equal partner with the MPP (former MPRP) in the2004-2012 coalition.

The last parliamentary elections were held in June 2012. The DP won 31 seats out of 76resulting in the formation of a coalition with four smaller parties led by ex PresidentNambaryn Enkhbayar’s MPRP. A new cabinet was then chosen, led by the DP NoroviinAltankhuyag as Prime Minister. The DP is expected to comprise 75% of the new cabinet.

A number of demonstrations took place in 2011 and 2012, prompted, among other things, byanger linked to the separating of MPRP from MP in 2011 and the corruption investigation and

1 Contributed by MahoneyLiotta LLC2 Contributed by MahoneyLiotta LLC3 Contributed by MahoneyLiotta LLC4 Contributed by MahoneyLiotta LLC


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arrest of ex President Nambaryn Enkhbayar. However, the country’s politics have generallybeen stable, and recent protests have been on a much smaller scale than, for example, thoserelated to the 2008 election result.

The next parliament election will take place in the summer of 2016 and Presidential electionwill take place in the summer of next year.

1.3 Legal System

Legislative Framework5

The legal system of Mongolia has changed with the government since the democraticrevolution of 1990 and is part of the Continental (Romano-Germanic) legal tradition. The coreof Mongolian law is the Constitution that was enacted in 1992. The provisions of theConstitution, the laws corresponding to it, other regulatory legal acts, international treatiesand other commitments of Mongolia as well as regulatory resolutions of Constitutional Court(Tsets) and the Supreme Court comprise the functioning law in Mongolia.

International treaties ratified by Mongolia have equal weight as its domestic laws and aredirectly implemented except in cases when the application of an international treaty requiresthe promulgation of a law. According to the Constitution of Mongolia, international treatiesand other legal documents that contradict the Constitution should not be followed.

Courts

The court system of Mongolia includes the Supreme Court, regional courts and other courts,established by law (e.g. specialized by types of cases).

The Supreme Court of Mongolia is the highest court in the judiciary system of Mongolia. TheSupreme Court hears appeals of lower court decisions as well as human rights cases referredto it by the Prosecutor General or the Constitutional Court of Mongolia. The Supreme Courtinterprets all Mongolian laws except for the Constitution, which is the province of theConstitutional Court.

Judicial Administration

Within the Judicial Administration, judges of the Supreme Court and other courts areappointed by the President of Mongolia. The nominations for judges are made from theCourt’s General Council, whereas those for judges of the Supreme Court should additionallybe approved by the State Great Khural. The Supreme Court selects one of its members to beChief Judge, whose appointment is made by the President for the six year term.

1.4 People

Population

Mongolia's total population according to the World Bank is 2,800,100. About 73 % of the totalpopulation is above 15 and 27% are under 14. Approximately 32% of the population isnomadic or semi-nomadic. Ulaanbaatar, the capital and largest city, is home to about 45% ofthe population.

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Since the end of socialism, Mongolia has experienced a decline of total fertility rate (childrenper woman) that is steeper than in any other country in the world, according to recent UNestimations: in 1970-1975, fertility was estimated to be 7.33 children per woman, but in 2005-2010 it was 1.87 (4 times less).

Ethnic Mongols account for about 85% of the population and consist of Khalkha and othergroups, all distinguished primarily by dialects of the Mongol language. The Khalkha make up82.4% of the ethnic Mongol population. The remaining 17.6% include Buryats, DurbetMongols and others in the north and Dariganga Mongols in the east. Turkic peoples (Kazakhs,Tuvas, and Chantuu (Uzbek) constitute 4.07% of Mongolia's population, and the rest areTungusic peoples, Chinese, and Russians.

Religion

According to the 2010 capitation from National Statistics Office of Mongolia, 53% ofMongolia's population follows the Tibetan Buddhism, 38.6% are listed as having no religion5.4% are Shamanist, Bahá'í and Christian, and 3% are Muslim.

Various forms of Shamanism have been widely practiced throughout the history of what isnow modern day Mongolia; as such beliefs were common among nomadic people in Asianhistory. Such beliefs gradually gave way to Tibetan Buddhism, but Shamanism has left a markon Mongolian religious culture, and continues to be practiced. Amongst the Mongol elite ofthe Mongol Empire, Islam was generally favored over other religions, as three of the fourmajor khanates adopted Islam.

Throughout much of the 20th century, the communist government ensured that the religiouspractices of the Mongolian people were largely repressed. Khorloogiin Choibalsan compliedwith the orders of Joseph Stalin, destroying almost all of Mongolia's over 700 Buddhistmonasteries and killing thousands of monks. The number of Buddhist monks dropped from100,000 in 1924 to 110 in 1990.

The fall of communism in 1990 restored the legality of public religious practice, and TibetanBuddhism, which had been the predominant religion in the region before the rise ofcommunism; again rose to become the most widely practiced religion in Mongolia. The end ofreligious repression in the 1990s also allowed for other religions, such as Islam, Baha'i Faithand Christianity, to spread in the country. According to the Christian missionary groupBarnabas Fund, the number of Christians grew from just four in 1989 to around 41,117 as of2008.

Languages

The official language of Mongolia is Khalkha Mongolian, and is spoken by 82.4% of thepopulation. A variety of different dialects are spoken across the country. These dialects areincluded in the Mongolic languages. Mongolic is frequently included in the Altaic languages, agroup of languages named after the Altay Mountains that also includes the Turkic andTungusic languages.

Today, Mongolian is written using the Cyrillic alphabet, although in the past it was writtenusing the Mongolian script. An official reintroduction of the old script was planned for 1994,but has not yet taken place as older generations’ encountered practical difficulties. Thetraditional alphabet is being slowly reintroduced through schools.

In the west of the country, the Kazakh and Tuvan languages, among others, are also spoken.The Russian language is the most frequently spoken foreign language in Mongolia, followed


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by English, though English has been gradually replacing Russian as the second language.Korean has gained popularity as tens of thousands of Mongolians work in South Korea.Interest in Chinese, as the language of the other neighboring power, has been growing.Japanese is also popular among the younger people. A number of older educated Mongoliansspeak some German, as they studied in the former East Germany, while a few speak otherlanguages from the former Eastern Bloc. Some younger Mongolians are fluent in the WesternEuropean languages as they study or work in foreign countries including Germany, Franceand Italy.

Education

During the state socialist period, education was one of the areas of significant achievement inMongolia. Illiteracy was virtually eliminated, in part through the use of seasonal boardingschools for children of nomadic families. Funding to these boarding schools was cut in the1990s, contributing to slightly increased illiteracy.

Primary and secondary education formerly lasted 10 years, but was expanded to 11 years.Since the 2008-2009 school years, new first graders are using the 12 year system. As such, fulltransition to the 12-year system will not happen until the 2019-2020 school year, when thecurrent first graders graduate.

Mongolian national universities are all spin-offs from the National University of Mongolia andthe Mongolian University of Science and Technology.

The broad liberalization of the 1990s led to a boom in private institutions of higher educationalthough there is a wide range in their quality.

Living Standards

With a Human Development Index (HDI) of 0.653 out of 1.000, Mongolia has a rank of 110th

among 187 countries (improved from 115th in the previous year), compared to Russia’s HDI of0.755 and China’s of 0.687. Between 2000 and 2010 Mongolia's HDI rose by almost 1.7%annually, reflecting the progressive growth of the index in most regions of the world. Eachyear UNDP’s Human Development Report publishes the human development index (HDI)which looks beyond GDP to a broader definition of well-being. By looking at some of the mostfundamental aspects of people’s lives and opportunities the HDI provides a much morecomplete picture of a country's development than other indicators, such as GDP per capita.

The living standards in Mongolia are, however, not the same across the population and thecountry. According to the UNDP’s data, the poverty level of the rural population (43%) tendsto be much higher than that of the urban population (30%) while around 22% of theMongolia’s population lives on $1 or less a day.

1.5 Economy

General Overview

Mongolia’s currency, the tugrik, fell sharply against the US dollar following a fall incommodity prices in late 2008, and has experienced continued ups and downs since then on.By the beginning of August 2012 the exchange rate had reached USD 1: MNT 1,356, comparedwith USD 1: MNT 1,253 in August 2011 and USD 1: MNT 1,532 at the end of February 2009,when the currency was at its weakest.


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The strengthening of the exchange rate is largely related to the rebound in copper and goldprices since early 2009. The stabilisation of the exchange rate has allowed the Central Bank ofMongolia (the central bank) to continue the process of rebuilding the country’s foreign-exchange reserves, which fell sharply in early 2009 as the central bank tried to support thecurrency by selling its reserves of foreign currency. By June 2011, total foreign-exchangereserves had recovered to around USD 2.5bn, double that of 2009.

The economy grew by 6.1% in 2010 following a contraction of 1.3% in 2009. The last quarterof 2010 ended with a broad-based recovery, supported by transportation and construction. Ona 12-month rolling basis, the budget surplus increased to 2.4% of GDP in March 2011, up froma 5% deficit in March 2010. The 2011 budget of Mongolia predicts a steep increase ingovernment spending to an un-precedented 779 billion MNT, equal to 52% of GDP, accordingto the World Bank.

Furthermore, imports increased to record levels of 86%, widening the trade deficit to US$ 646million, whereas exports went up to 71%. This was supported by the upward drive in metalprices and large coal and copper imports by China, who absorbs 90% of Mongolia’s exports.

Transportation

Mongolia has a number of domestic airports. The only international airport is the ChinggisKhaan International Airport in Ulaanbaatar. Direct flight connections exist between Mongoliaand South Korea, China, Japan, Russia, Germany and Turkey. MIAT is Mongolia's largestcarrier in Mongolia and provides both domestic and international flights.

The Trans-Mongolian Railway is the main rail link between Mongolia and its neighbors. Itbegins at the Trans-Siberian Railway in Russia at the town of Ulan Ude, crosses intoMongolia, runs through Ulaanbaatar and then passes into China at Erenhot where it joins theChinese railway system. A separate railroad link connects the eastern city of Choibalsan withthe Trans-Siberian Railway; however, that link is closed to passengers after the Mongoliantown of Chuluunkhoroot.

Most overland roads in Mongolia are only gravel roads or simple cross-country tracks. Thereare paved roads from Ulaanbaatar to the Russian and Chinese border and from Darkhan toBulgan. Some road construction projects are currently underway and some have already beencompleted—for example, construction of the east–west so-called Millennium Road.

Telecommunications

Mongolia’s telephone network is improving with international direct dialing available in manyareas. A fiber-optic network has been installed that is improving broadband andcommunication services between major urban centers with multiple companies providinginter-city fiber-optic cable services. The fixed-line telephone system has a very low tele-density with a decreasing number of main lines. There were around 141,000 lines in use bythe end of 2009, a 7% drop compared to the preceding year. In contrast, the mobile phonesubscribership serviced by four providers is increasing rapidly reaching 2.2 million in 2009.According to the National Statistics Office, every soum (administrative unit in Mongolia) isnow covered by cellular service.

Expansion of Internet use has been limited by the relatively low ownership of computers inMongolia. Most users access the Internet at public or work facilities. Usage is concentrated inUlaanbaatar. In 2010, 709,625 (25.7%) people were using the Internet.


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1.6 Foreign Trade

In 2011, Mongolia’s exports and imports increased by 2% and 63% respectively compared tothe corresponding amounts in 2010, thereby increasing the country’s trade deficit by 7.4%.The main export commodities were copper concentrates 25.9%, coal 35.7%, iron ore 9.2%,crude oil 5.5%, raw cashmere 5.2%, zinc ore concentrates 4.1%, gold 3.4%, fluorspar oreconcentrates 2.0%, molybdenum ore concentrates 1.3% and others 6.9%.

Mongolia’s imports are dominated by mineral products (most of which are oil products),machinery and equipment as well as transport vehicles. Imports from Russia are largest,followed by China and South Korea.

1.7 Mining in Mongolia6

Mongolia has rich mineral resources and exploitation of these has been increasing in thetransition period to the market economy

Strategic Deposits7

By definition of the Law on Minerals, mineral resources naturally occurring on and under theearth's surface in Mongolia are the property of the State. Therefore, the State, as the owner,has the right to grant exploration and mining rights.

The State also has the right to own a certain percentage in a mineral deposit of strategicimportance (a deposit which may have a potential impact on national security, national orregional economic or social development or that is producing or has the potential to producemore than 5% of the total annual gross domestic product). If the deposit qualifies as amineral deposit of strategic importancethen the State may acquire a certain percentage asfollows. The State may participate up to 50% jointly with a private legal person in theexploitation of a mineral deposit of strategic importance where the State can prove that it hasconducted State funded exploration and that the State funded exploration was used todetermine the proven reserves. However, the legislation does not prescribe what form thisequity interest might take and it is unclear what the drafters mean by “participate”. Thepercentage of the State share shall be determined by an agreement on exploitation of thedeposit considering the amount of investment made by the State. The State may own up to34%of the shares of an investment to be made by a licenseholder in a mineral deposit ofstrategic importance where proven reserves were determined through funding sources otherthan the State budget (non-State funded exploration of a strategic deposit). The percentage ofthe State share shall be determined by an agreement on exploitation of the depositconsidering the amount of investment made by the State.

Exploration Exploitation

State funded exploration of a strategicdeposit where reserves are determinedby the State funded exploration

State may have up to 50% participation interest

Non-state funded exploration of astrategic deposit where the reserves aredetermined by other means

State may own up to 34% of shares of an investment

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The Mongolian government has identified a number of the largest deposits that have strategicimportance for the country and where development of the mining industry should be focused.Currently, fifteen (15) deposits that have been classified as “Strategic Deposits” (shown in thetable below). These are currently held either by the State Property Committee, throughestablished state-owned enterprises (SOEs), or in some cases by the private sector. There arean additional thirty-nine (39) deposits under consideration for classification as “StrategicDeposits.”

LIST OF STRATEGIC DEPOSITS

NoDepositname

Type ofMineral

Location Reserves & Resources

1TavanTolgoi

Fossil coalUmnugobi,Tsogttsetsii

6420 million tonnes coal

2NariinSukhait

Fossil coalUmnugobi,Gurvantes

125.5 million tonnes coal

3 Baganuur Brown coalUlaanbaatar,Baganuur

600 million tonnes coal

4ShiveeOvoo

Brown coalGobisumber,ShiveeGobi

646.2 million tonnes coal

5 Mardai Uranium Dornod, Dashbalbar 1104 tonnes at 0.119% U3O8

6 Dornod Uranium Dornod, Dashbalbar 28868 tonnes at 0.175% U3O8


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7GurvanBulag

Uranium Dornod, Dashbalbar 16073 tonnes at 0.152% U3O8

8 Tomortei Iron Selenge, Khuder 229.3 million tonnes at 51.15% Fe

9 Oyu Tolgoi Copper, GoldUmnugobi,Khanbogd

2.7 billion tonnes of ore, 25.4 milliontonnes of copper, 1028 tonnes of gold

10Tsagaansuvarga

Copper,molybdenum

Dornogobi, Mandakh10.64 million tonnes oxides at 0.42% Cuand 0.011% Mo, 240.1 million tonnessulphides at 0.53% Cu and 0.018% Mo

11 ErdenetCopper,molybdenum

Orkhon, Bayan-ondor

1.2 billion tonnes at 0.51% Cu and0.012% Mo

12 Burenkhaan PhosphorKhubsugul, Alag-Erdene

192.24 million tonnes at 21.1% P2O5

13 Boroo Gold Selenge, Bayangol 24.5 thousand tonnes at 1.6g/tonn Au

14TomorteinOvoo

ZincSukhbaatar,Sukhbaatar

7.7 million tonnes at 11.5% Zn

15 Asgat SilverBayan-Ulgii,Nogoonnuur

6.4 million tonnes at 351.08g/tonn Ag

2. BUSINESS ENVIRONMENT

2.1 Business Climate

Mongolia is continuing to develop its systems of business law, taxation, banking, and externallinks to the international business community and, most importantly, a market economy.Entering Mongolia presents, however, a unique challenge to business people when attemptingto assess real business risks and to make reality-based decisions rather than relying onperceptions. Abundant natural resource wealth and agricultural production make Mongolia'spopulation one of the potentially richest countries per capita in the region. However,converting this potential into reality requires many critical factors to function in concert.Attracting and protecting investors is among the most critical of these factors.

The question will be whether Mongolia's legal and business infrastructure will be able to keeppace with the demands inherent to investment development. Mongolia has successfullyintroduced concepts of property ownership, human rights, environmental protection andinvestment protection. In so doing, Mongolia has taken a giant step in meeting thesedevelopment needs. New laws that appear to be consistent with the intent of the constitutionare frequently drafted and adopted. However, a number of operational regulations and legalpractices are based on or derived from the pre-1990 period.

Despite the recent global crisis and recent political events in the region, foreign investors arefocusing more closely on Central Asia as a whole.

Investors whether multinational mining companies or small trading companies, continue toweigh the risks associated with Mongolia investments and are mindful of the impact that afluctuating commodity price, like copper and coal, can have on this emerging economy thatdepends heavily on its natural resources.


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2.2. Free Trade Zones

The Mongolian government launched its free trade zone (FTZ) program in 2004. Currentlythere are two FTZ areas located along the Mongolia spur of the trans-Siberian highway: one inthe north at the Russia-Mongolia border town of Altanbulag and the other in the south at theChinese-Mongolia border at the town of Zamyn-Uud. The port of entry of Tsagaan Nuur inBayan-Olgii province is being developed as the site of a third FTZ.

2.3 International Agreements8

Mongolia is a party to many international treaties in various areas – from the protection ofthe environment to free trade, the protection of foreign investments and the avoidance ofdouble taxation. Notably, it ratified a number of basic international conventions – the Treatyon the Civil and Political Rights (New York, 1966) and the Treaty on Economical, Social andCultural Rights (New York, 1966). Mongolia has been a member of the WTO since 1997.Mongolian legislation recognizes the primacy of International Treaties in case of a conflictwith domestic legislation.

With respect to foreign investment, Mongolia is a signatory to the Washington Convention onthe Settlement of Investment Disputes between the State and National of Another State (1965,joined in1996), which provides for the settlement of international investment disputes. It isalso a signatory to the Seoul Convention on Investment Insurance (1985, joined 1999) and hasbeen a member of the Multilateral Investment Guarantee Agency (MIGA) since 1999, whichensures the eligibility of foreign investors for risk insurance through MIGA.

Mongolia has negotiated bilateral agreements with numerous countries. Encouraging andMutual Protection of Investment Agreements have been negotiated with 39 countries andExemption on Double Taxation Agreements have been negotiated with 34 countries.

2.4 Legal Environment9

The Mongolian legal system is based on the Roman-German (continental) legal system. Theprincipal legal act is the Constitution (1992). In many cases, laws are worded widely orvaguely leaving latitude for alternative interpretations.

State bodies can issue regulations, some of which are considered as regulatory legal acts.Authorities applying regulations are generally reluctant in applying more general provisionsstipulated by laws and are more comfortable in applying more detailed/specific regulations.

The Arbitration Law of 2003 regulates arbitration disputes. In the drafting of contracts inMongolia, in most cases parties are free to select international arbitration as the method forthe resolution of disputes of certain types of international trade, contractual and non-contractual civil disputes. Mongolia is a signatory to the New York Convention on theRecognition and Enforcement of Foreign Arbitral Awards (New York Convention), whichmandates that arbitration awards made within the Territory of Mongolia are enforceable inMongolia and other countries that are parties to the New York Convention.

The Arbitration Bureau operated by the Mongolian National Chamber of Commerce andIndustry, is sometimes regarded by Mongolian business people and government agencies thatdeal with foreign investors as politically not independent and unfamiliar with commercialpractices, prompting a preference for international arbitration. However, support for binding



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international arbitration has not penetrated local Mongolian agencies responsible forexecuting judgments.

2.5 Regulations for Business10

Foreign Currency Regime

The Mongolian government employs a limited regulatory regime for controlling foreignexchange for investment remittances and maintains exceptionally liberal policies for thesetransactions. Though typically there is no difficulty in obtaining foreign exchange, whether theinvestor wants Chinese Renminbi, Euros, British Pounds, Rubles, or U.S. Dollars, there aretimes when limits arise based on the availability of foreign currency in the Mongolianmarketplace.

In regards to domestic transactions, in 2009 the Parliament of Mongolia enacted legislationmandating that local transactions be expressed and settled only in the local currency. As aresult, all domestic transactions must be conducted in Mongolia’s national currency, theTugrik, except those entities allowed specific waivers as determined by the Central Bank ofMongolia and the Financial Regulatory Commission.

The Mongolian government wants funds to flow easily in and out of the nation, with oneexception. Foreign-held interest bearing dollar accounts remain subject to a 20% withholdingtax, unless the term is reduced pursuant to an applicable tax treaty. The bank retains 20% ofall such interest payments sent abroad, and remits this withholding to the Tax Authority ofMongolia. Otherwise, businesses report no delays in remitting investment returns or receivingin-bound funds. Most transfers occur within 1-3 business days or at most a single businessweek.

Ease of transfer aside, foreign investors criticize Mongolia’s lack of sophisticated mechanismsfor converting currencies and parking money. Letters of credit are difficult to obtain, and legalparallel markets do not exist in the form of government dollar denominated bonds or otherinstruments for parking funds in lieu of payment. Many Mongolian financial institutions lackexperience with these arrangements.

Competition Law

The first Law on Prohibiting Unfair Competition was passed in 1993 and on June 10, 2010 theParliament approved the amended Law “On Competition”.

The purpose of this Law is to provide conditions for fair market competition amongentrepreneurs, to prevent and prohibit any activities that allow market domination and lessencompetition, to determine the legal basis for the competition regulatory authority and toregulate the relations among them.

It should be noted that the ability for Mongolia to engage with and confront complex anti-trust issues and competition cases is limited due the lack of relevant skills and knowledge ofits professionals.

Intellectual Property

Mongolia has joined the World Intellectual Property Organization (WIPO) and signed andratified most treaties and conventions, including the WTO TRIPS agreement. The WIPO



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Copyright Treaty (WCT) and the WIPO Performances and Phonograms Treaty (WPPT),collectively known as The WIPO Internet Treaties, were signed and subsequently ratified onJuly 25, 2002.

Under TRIPS and Mongolian law, the Mongolian Customs Authority and the EconomicCrimes Unit of the National Police (ECU) also have an obligation to protect IntellectualProperty Rights (IPRs). The Mongolian Customs Authority may deny the entry of goodshaving disputed IPRs at the board, based on a petition by the owner of the relevant IPRs. TheECU has the exclusive power to conduct criminal investigations and bring criminal chargesagainst IPR pirates. The IPOM has the administrative authority to investigate and seize fakeswithout a court order. Of these three, the IPOM makes the most consistent good faith effort tofulfill its mandates.

Consumer Protection

The protection of consumers is governed by the Law "On the Protection of Consumer Rights",initially adopted in 1991 and amended in 2003. This law regulates the relationship betweenconsumers and vendors or providers of work and services, and establishes rights andobligations. As per the law, consumers have the following primary rights to enjoy the highquality and safety of goods and services, to acquire product information and to getcompensated for losses and damages due to producer and vendor faults.

Company Law

In late 2011 Parliament replaced the 2009 Company Law. When compared with the 2009Company Law, the 2011 Company Law provides for greater personal liability of governingpersons, administrative sanctions for non-compliance, greater corporate governanceregulations and introduces closed venture companies. This provides for reorganizationthrough merger, consolidation, separation, division, transformation.

2.6 Property Market

Office space in Ulaanbaatar remains considerably cheaper than in the neighboring countriesalthough there are an increasing number of new buildings that offer A Class office space.

Renting an apartment costs anywhere from USD 500 a month for a reasonable two-roomapartment in the suburbs to as much as one is willing to pay for a five to six-room flat fullyfurnished (with local or foreign furniture) in the city's centre. It is important to confirm thatthe person renting the property has its legal title and, therefore, the right to lease theapartment. In addition, proper identification and a simple lease agreement in Mongolian andEnglish should be obtained. Leases, at a very minimum, should state the terms of renting theproperty and should form the basis for a working relationship and understanding with alandlord. In some arrangements, the landlord agrees to cover utilities charges (exceptinternational phone charges) and to carry out basic repairs.

Foreigners are entitled to own buildings in Mongolia but not land. Landlords are unwilling toconsider rental periods of less than three months, especially for residential accommodation.There are a number of real-estate agencies that can offer assistance in this and other areas fora reasonable fee.

Activities associated with land usage and ownership are regulated by the Land Law of 2002.


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3. FOREIGN INVESTMENT

3.1 Foreign Investment 11

The Law on Foreign Investment of 1993 was designed to encourage foreign investment, toprotect the rights and assets of foreign investors in Mongolia, and to regulate matters relatingto the foreign investment. It also sets out the provisions for tax stability agreements forinvesting entities.

In general, Mongolian law does not discriminate against foreign investors. Foreigners mayinvest with as little as USD 100,000 cash or the equivalent value of capital material (officestock, structures, autos, etc.). In both law and practice, foreigners may own 100% of anyregistered business (except in the areas of strategic importance as detailed below) withabsolutely no legal, regulatory, or administrative requirement to take on any Mongolian entityas a joint venture partner, shareholder, or agent.

Prior to 2012, there was only one restriction on foreign ownership of shares. Pursuant to theWater Law, only wholly owned Mongolian entities may obtain licenses to conduct activitiessuch as the exploration and research of water resources. However, 2009 and 2012 regulatoryand legislative acts in the areas of foreign investment, environmental law, taxation, andmineral rights effectively narrow Mongolia's openness to FDI. While most Mongolianindustrial and economic strategies do not discriminate actively or passively for or againstforeign investors, specific governmental acts regarding foreign involvement in sectors ofstrategic importance and in Mongolia’s nascent uranium sector have spurred criticism thatthe government is curtailing the rights of foreign investors in favor of the Mongolian state.There is concern that changes to the uranium law have created a precedent for furtherrestrictions on FDI.

Shortly before the June 2012 elections, Parliament was put under pressure to enact legislationwith respect to foreign direct investment in business entities within certain sectors. In May2012 Parliament enacted the Law of Mongolia on the Regulation of Foreign Investment inBusiness Entities Operating in Sectors of Strategic Importance (SEFIL).The SEFIL regulatesinvestment by foreign investors, their affiliated entities or third parties in sectors of strategicimportance: minerals; banking and finance; and media and communications. Additionalsectors may be added on a case-by-case basis. The SEFIL is more broadly applied with respectto state owned legal entities, entities with state ownership, international organizations, theiraffiliated entities or third parties. Further, they are regulated even outside of sectors ofstrategic importance if they choose to “operate” in Mongolia or invest into businesses,affiliated entities or third parties carrying out business operations in Mongolia.

The hasty drafting of the SEFIL has led to much confusion over its substantive and proceduralrequirements, as well as its overall enforceability and impact on the foreign investmentcommunity. Key concerns with the SEFIL include, the timing for approval of transactions withforeign investment; the negative impact on publically listed companies or companiespreparing to list either inside or outside Mongolia; limitations on obtaining financing; theeffective lock-up on the Mongolian party; its failure to clearly address collective foreigninvestment and the potential for the SEFIL to be a gateway to the wholesale bar of certainforeign investors.



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4. BANKING AND FINANCE

4.1 Banking System

Since 1991 Mongolia has had a two-tier banking system. The Bank of Mongolia is the centralbank of Mongolia and represents the upper (first) tier of the banking system of Mongolia. Allother banks represent the lower (second) tier of the banking system.

The Bank of Mongolia formulates and implements monetary policy by regulating moneysupply through changes in reserve money to achieve its main objective of currency stability,according to the Central Bank Law of 1996. The BOM has focused on price and exchange ratestability, while ensuring adequate money supply.

The Bank of Mongolia is not guided by the aim of earning profit in performing its tasks.

The Bank of Mongolia headed by a Governor appointed by the Parliament for a term of up tosix years. The Governor of the Bank of Mongolia is accountable to the Parliament.The banking sector of Mongolia is highly concentrated with the three largest commercialbanks (Khan Bank, Golomt Bank, and Trade and Development Bank) representing more than80% of total assets (amounting to approximately USD 7.7 billion as of 30 June 2012). Thebanking sector has been one of the most attractive sectors for foreign investors in recent yearsand has attracted considerable investor interest from Japan, the USA, Russia and othercountries. Though most of the major banks are financed in part by foreign investors at presentonly two foreign banks have representative offices in Mongolia: ING and Standard CharteredBank.

Based on regulations adopted during 2011, the minimum capital requirement for commercialbanks has increased from MNT 8 billion (approximately USD 6 million) to MNT 16 billion(approximately USD 12 million). This requirement is effective 1 May 2013. Foreign banks mayestablish local subsidiaries no earlier than one year after the establishment of their Mongolianrepresentative offices. Further, the minimum share capital requirement for a Mongoliansubsidiary of a foreign bank is set at USD 50 million. As a result, consolidation of the bankingsector is expected in the following years.

The largest commercial banks are rated by the international rating agencies and have plansfor IPOs in the following years. Bond issues are expected to be a first step for establishingreputation on the international market before proceeding with IPOs.

The profitability of banks is high compared to most advanced countries. Risk aversion ofbanking sector is relatively high, though it has been gradually reducing. Investments infinancial instruments are not sophisticated and a significant portion of assets relate to theinvestment in cash and bills issued by the Central Bank or other instruments guaranteed bythe Government of Mongolia.

The banking sector was affected by the financial crisis during 2009, which led to problems inrecoverability of loans and a significant increase in impairment provision rates. Confidence inthe banking sector has been improving since then and resulted in a rapid growth of totalassets by 50.1% in 2011, which was mainly invested in growing the loan portfolio. The growthwas substantially financed by inflows of both domestic and foreign currency deposits, whichwas fueled by the development of Mongolia’s mineral resources. The growth of deposits and


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lending slowed down during the first half of 2012, though growth rates in total assets andlending is still relatively high. At present the main factor hindering the growth of bankingsector is the lack of capital (particularly Tier I) or other financial sources. In the light ofupcoming large scale mining, infrastructure and housing projects, and the demand forliquidity it creates, the Mongolian banks are currently undercapitalized. Compared to otheremerging markets, Mongolia has relatively low Tier 1 capital buffers. The ratio of non-performing loans (NPLs) to gross loans has been significantly reduced (4% in April 2012compared to 8% a year ago). However, this improvement is mainly result of the rapid growthof loan portfolios. High rates of lending growth over the past year have raised concerns aboutthe quality of bank assets, particularly taking into consideration that internal riskmanagement procedures and corporate governance are in developing stage.

4.2 Foreign Currency Market and Foreign Currency Rules

Mongolia issued its first national currency, the Tugrik, in 1925, based on a resolution issuedby the Bank of Mongolia on February 22, 1925.

According to Mongolian legislation, transactions between Mongolia legal entities should be inTugrik. Alternatively, transactions between a Mongolian legal entity and a foreign legal entitycan be denominated in any currency. This was enacted on July 9, 2009 in the Law ofMongolia on Conducting Settlement in National Currency.

4.3 Investment Institutions12

The National Investment Bank of Mongolia (NIBank) was established in 2006 and was thefirst formal investment institution in Mongolia with joint investments from Mongolia, Japanand the USA. Its services include both commercial and investment banking products.

In May 2011, the Mongolian government officially launched the Development Bank ofMongolia, a state-owned policy bank with a mandate to provide medium and long-term loansto the strategically important sectors (such as infrastructure, industry, energy etc.). Thebank’s role is also expanding cooperation with the international development banks andorganizations, and attracting domestic and foreign capital for large scale priority projects thathelp to accelerate the economic growth of Mongolia. In March 2012, the bank successfullyplaced 5-year USD 580 million sovereign-guaranteed notes to international investors underthe Euro Medium Term Note Programme. The note issue is fully guaranteed by the Mongoliangovernment and is rated B1 by Moody’s and BB- by S&P, equal to Mongolia’s credit rating.The notes were placed at 5.75% to 6.0% p.a. below the initial guidance due to high demand.

There are several mechanisms through which incentives to investors are offered, in the formof investment agreements (under either the Foreign Investment Law or the Minerals Law),which are mainly for tax stability, and the Concessions Law, which provides for taxconcessions in priority sectors of the Mongolian economy.

4.4 Capital Markets13

The Mongolian Stock Exchange (MSE) was established in 1991 as a vehicle to implement thegovernment's plan for privatization of large state-owned enterprises. In an attempt to ensurean equitable distribution of assets, the Mongolian government chose to initiate a voucher-based scheme; one blue voucher worth MNT 7,000 was issued to every citizen born before 31May 1991 for the purchase of shares in large enterprises and red vouchers worth MNT 3,000,



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which could be used to purchase assets in smaller enterprises not listed on the exchange.Auctions officially began on February 7, 1992.

During this first phase, trading was only open for two hours, one day per week. In 1995,parliament passed the ‘Law on Securities’, allowing the MSE to operate as a regular stockexchange open to both domestic and foreign investors. This also established the two tieredexchange with the primary market for IPOs and the secondary market for subsequent trading.Trading is now open between 11.00 and 13.00 every weekday for the both primary andsecondary markets. Trading can also be done over the internet.

The revision to the Securities and Exchange Law adopted by the Parliament in December2002, transformed MSE into a 100 per cent state owned company. The MSE signed‘memoranda of understanding’ with the Korean, Singaporean and Hong Kong StockExchanges, to help with its development and attract more foreign investment. In April 2011,the MSE formally agreed to a partnership with the London Stock Exchange (LSE) aimed attransforming MSE to operate on an international scale. The partnership agreement providesfor the development of systems infrastructure, the support of senior experienced people tomanage the transformation and skills and policy development. The intention is to increase theability to trade and to make it an attractive option for Mongolian companies and overseasinvestors. There are currently around 410 companies listed on the MSE, over one-fifth ofwhich are involved in mining, the most common sector for foreign investment. As of yet thereis no restriction on foreign ownership of shares, although in the uranium sector, for example,ownership must be approved by the Nuclear Energy Agency, which could in theory refuse thetransfer of shares to a foreign entity. In accordance with the partnership agreement, MSE haslaunched new trade and payment system in cooperation with London Stock Exchange in July2012.

4.5 Insurance sector

Insurance activities in Mongolia are regulated by the Insurance Law of Mongolia, which wasapproved in 2004 and updated in 2005. Under this law, the Financial Regulatory Commissionof Mongolia (FRC) is responsible for regulating insurance companies through its adoption ofregulations and issuing insurance licenses, as well as for supervising insurance companiesoperating in Mongolia. Under the current law, companies registered in Mongolia are notallowed to enter into insurance contracts with insurance companies that have not obtained alicense from the FRC, including foreign insurance companies, unless FRC approval isobtained. At present the regulatory minimum share capital is MNT 1 billion (approximatelyUSD 750 thousand), increasing to MNT 2 billion (approximately USD 1,5 million) from 1January 2013.

The Mongolian insurance market is at an early stage of development with insurancepenetration (premium income as a share of GDP) of only 0.5%, though it is growing at fastrate. In the last five years total assets have more than tripled, whilst the gross writtenpremium has doubled. At present the insurance sector consists of 17 insurance companies: 16general insurance and one life insurance company. The top five largest insurance companiesrepresent more than 70% of gross written premium. The majority of insurance products coverproperty and liability insurance. As the size and financial strength of Mongolian insurancecompanies is limited, high risk and high value insurance policies are usually reinsured withinternational reinsurance companies.

Mining sector growth is expected to be the key driving force behind the expansion of theMongolian insurance industry. Workers, equipment, infrastructure, and mines themselveswill all need to be covered as projects become operational. Further, legislation mandating thatevery driver within the country must be insured by 1 October 2012 was introduced in 2011.This is estimated to result in a 30% increase in the size of the insurance market. Rapidexpansion planned for the following years, however, necessitates further improvements in


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capital management, as well as insurance and financial risk management and other internalprocess of insurance companies.

5. IMPORTING AND EXPORTING14

5.1 Trends in Customs Policy

Several ministries and agencies, in consultation with representatives of the private sector, areinvolved in the formulation and implementation of trade policies. The Ministry of Industryand Trade is the main government agency responsible with monitoring and in particular it’sTrade Policy and Cooperation Department is responsible for coordinating trade policy. TheMinistry is also responsible for all issues related to trade promotion, trade facilitation andexport development. Import and export activities are regulated by the Customs Law of 2008.

In 1991, Mongolia became a member of the Customs Co-operation Council, which changed itsname to the World Customs Organization in 1994. Since January 1, 2003, Mongolia has usedthe harmonized commodity description and coding system (HS 2002) at an eight digit level.As a WTO member, Mongolia may offer most favored nation (MFN) treatment to importsfrom all trading partners, including non-WTO members.

5.2 Import Restrictions

No approval is required to import goods into Mongolia, but the importer must be registeredwith the tax authorities and the State Registry Office. Imports to Mongolia are not subject torestriction, with the exception of import licensing, which applies to only a few products, aswell as other products subject to import prohibition.

Pursuant to a series of government resolutions, in general, the limited licensing system inplace is for the protection of human health, animal and plant health and safeguardingnational security. Import licenses are required for imports of certain products, includingchemicals, human blood and organs, explosives and guns. Import licenses for restrictedproducts are issued by the sectoral ministries, such as the Ministry of Environment, Ministryof Education, Culture and Science, Ministry of Food and Agriculture and the Ministry ofHealth.

Products prohibited for import into Mongolia include certain drugs, narcotics and spirits.

5.3 Customs Duties

Custom duties must be paid following the completion of the final customs clearance. Underthe Customs Tariff Law of 2008, Mongolia’s customs tariffs consist of general, most favorednation (MFN) bound and applied. Customs tariffs are calculated ad valorem on c.i.f. values ofimports. An ad valorem MFN tariff rate of 5 per cent is applied to most imported goods.However, a zero tariff rate is applied to 49 other tariff lines, including live animals forbreeding, horses, cows, pigs, sheep, goats, information dissemination equipment and its spareparts, other machines for information development, transistor diodes and similar transistorsand various medical equipment. A seasonal import duty rate of 15 per cent is applied on flourand vegetables to protect domestic producers between 1 August and 1 April. Outside of thisperiod the rate is 5 per cent. Mongolia bound all its tariffs at 20 per cent for most tariff lines.



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The range of applied MFN rates is zero to 15 per cent. Mongolia does not grant anypreferential tariffs.

The tax base is the price determined by Customs in conformity with the Custom Tariff Law,plus customs duty, excise tax, and other taxes.

The Excise Tax Law of 2006 provides that, in general, excise taxes are levied on goodsconsidered to be damaging to health or the environment. It is also levied on luxury items andon items related to gambling, alcohols, cigarettes, petroleum and cars. Excise taxes apply tothe above goods produced in Mongolia as well as to imports and are calculated either byquantity, or as a percentage of the value of the dutiable goods.

5.4 Temporary Import Relief

The Customs Law contains provisions on temporary admission of machinery and equipment.It can be imported temporarily for re-export under the condition that the goods are importedfor use in demonstrations or exhibitions and will be re-exported within one year. If theimporter obtains an import/export permit, such temporary imports are exempted fromcustoms duties.

5.5 Customs Duties Incentives

Pursuant to the Customs Law of 2008, the following items are exempt from Customs duties inMongolia:

– appliances for special use by the disabled and artificial organs and accompanying spareparts;

– goods for humanitarian assistance and similar donations;– equipment, facilities, materials, raw materials, appliances, petroleum, diesel fuel for oil

exploration, exploitation and use according to an agreement made with the Governmenton product sharing in oil sector;

– Mongolian national currency manufactured in foreign countries;– goods for official use by foreign diplomatic missions, consulates, the United Nations and

its specialized agencies;– travelers' personal effects;– blood, blood products, body and organs to be used for medical purposes;– gas fuel, designated containers, equipment, special machinery, facilities and equipment;– Civil aviation aircrafts and accompanying spare parts; and– Personal items for use by the head of the foreign diplomatic missions, diplomatic,

technical and service staff and their family members deemed necessary to move into thehost country.

–5.6 Documentation and Procedures

In order to facilitate the trade process “one-stop” services have been provided at the majorcustoms points of the country. These services are intended to make it possible to complete allthe necessary customs documentation and procedures in one location.

These procedures include processing of documents by customs authorities, custom valuation,payment of customs duties and all taxes and customs examination. Since 2001, Mongolia hasintroduced the Automated System for Customs Information Management (GAMAS), whichpermits the customs clearance and payment of customs duties and taxes to be done online.

Importers are also able to use the services of customs brokers who go through alldocumentation and other formal procedures on their behalf. Regulations on the operation ofcustoms brokers are issued by the Customs General Administration.


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Customs documents submitted in foreign languages are accepted at the discretion of thecustoms officer. If such documents are found to be inadequate or illegible, a Mongoliantranslation will be required. Most documents required for clearance are written in English andRussian and customs officials generally have at least a working knowledge of both languages.

5.7 Warehousing and Storage

Imported goods may be required to be put into a bonded warehouse in Mongolia in order forthe proper documentation to be prepared and duties and other taxes to be collected. Goodscan be stored for a maximum of two years with the possibility of a one year extension.

A variety of actions are allowed in bonded warehouses, including the inspection of the goods,unpacking, sorting and repackaging of goods, the repair of goods, taking samples for the useof customs, and other actions deemed necessary by the government.

Temporary customs warehouses also exist for the temporary storage of goods under customscontrol. Goods that have not cleared customs within three days may be stored in thesetemporary warehouses for up to two months.

6. BUSINESS ENTITIES15

6.1 Legal Framework

Economic and business activities in Mongolia are regulated by a variety of laws, such as theCompany Law of October 6, 2011, the Civil Code of January 10, 2002, the Law on ForeignInvestment of May 10, 1993, the Law on Regulation of Foreign Investment in BusinessEntities Operating in Sectors of Strategic Importance of May 17, 2012 and many others.

According to the Company Law and Foreign Investment Law, incorporation in Mongolia cantake the form of either a business entity with limited or no foreign investment (BELFI), or abusiness entity with foreign investment (BEFI). A BEFI is defined as a company having assetsworth more than 100,000 USD (or its equivalent in MNT) of which not less than 25% areowned by foreign investors. A BELFI is converted into a BEFI at the point in which a foreigninvestor acquires 25% or more of the shares of a BELFI through the sale, issuance, dividend,or otherwise, of such shares. Currently, Mongolian legislation allows for the incorporation ofjoint stock companies and limited liability companies, or the establishment of representativeoffices.

There are many financial, legal, commercial and tax implications arising from the choice ofvehicle. For example, representative offices cannot conduct commercial income-generatingactivities and are not considered legal entities. Foreign companies that intend to engage incommercial income-generating business activities in Mongolia typically structure theirpresence through a limited liability company.

Below we outline the main features of the most common forms of business entities.



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6.2 Joint Stock Companies (JSC)

General

A JSC may be either an open JSC or a closed JSC Generally, an open JSC is a company whosecapital invested by the shareholders is divided into shares, which are registered at theMongolian Stock Exchange and which may be freely traded by the public without regard topreemptive rights of the shareholders. A closed JSC is a company whose capital invested bythe shareholders is divided into shares, which are registered at the Securities Clearing Houseand Central Depository of Mongolia (SCH&CD), and which are traded outside of theMongolian Stock Exchange by means of closed subscription.

Open JSCs are required to report to the Financial Regulatory Commission (FRC) on financialand corporate matters.

Establishment

Both closed and open JSCs must be registered with the State Registration Office to acquireproper legal status in Mongolia. To register a JSC, the following documentation must besubmitted to the Sate Registration Office:

- Application form and request letter;- Charter;- Document confirming the address;- Minutes of the foundation meeting;- Balance sheet confirming the required minimum amount of owner’s equity;- Documents confirming the identity of founders and payment of the required fee for

state registration; and- Letter of Approval from the FRC.

The charter of a JSC must be notarized and should generally specify: full and brief name of thecompany, the number of authorized, issued and outstanding shares and their par value, thenumber of members of the Board of Directors (minimum 9 members, one-third of which shallbe independent members), procedures for the foundation, competency and activities of thecompany’s bodies, including procedures for convening a general meeting, preparation for andholding a general meeting of shareholders and meetings of collective bodies, procedures forinforming shareholders on the activities of the activity, a list of governing positions,mandatory appointment of an auditor, term of the fiscal year of the company fiscal, etc.

Initial capital is provided by contributions from subscribers and may take the form of cash orother property and property rights assessed in monetary equivalent. The minimum amount ofcharter capital for listing a JSC at the Mongolian Stock Exchange is MNT 10 million, with theexception of banks and insurance companies which must have a higher charter capital.

JSCs that will engage in mineral resources, banking and finance or media and communicationare subject to the approval of the Government of Mongolia, and in some cases Parliament,under the Law on Regulation of Foreign Investment in Business Entities Operating in Sectorsof Strategic Importance.

A closed JSC is formed through closed subscription, where the shares are offered only to acertain group of people through a subscription form. Upon completion of the subscriptionperiod, the subscribers issue the company charter and decision of the founders. Legal statusis acquired only when registered with the State Registration Office and the SCH&CD. As ofJuly 2012, the detailed procedure for the establishment and registration of closed JSCs is yet


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to be enacted by the FRC. Open JSCs have the additional requirement of having their sharesregistered with the FRC.

The most common practice of forming an open JSC is through re-organization of a limitedliability company. The shareholders of the limited liability company make a decision on suchre-organization by a minimum two-thirds vote. Following such resolution, the newly formedopen JSC is registered with the State Registration Office as stated above, provided howeverthat the FRC has approved such re-organization and registered its securities.

The legislation of Mongolia does not exclude the possibility of founding a JSC by a citizen withthe approval of the FRC and pursuant to the general procedures provided above. However,there is no previous experience of such establishment of a JSC.

Shares and Rights

The issuance of shares in an open JSC must conform with the Mongolian securities legislationand must be registered with the FRC. With regards to closed JSCs, the issuance of sharesmust be registered with the SCH&CD. There are two types of shares - ordinary and preferred.There is no limit to the number of preferred shares that can be issued.

The holding of preferred shares grants priority rights to receive dividends and also (asdetermined by the company’s charter) to participate in prior distribution of property in theevent of liquidation. A holder of a preferred share has no right to take part in themanagement of a JSC, except for certain cases provided by the law.

Dividends may be paid in monetary form, in property or in the form of securities. Thedecision on whether dividends will be distributed must be made by the company’s boardwithin 50 days after the end of the company’s fiscal year.

The Mongolian Company Law recognizes the concept of "golden" shares but only in the caseof privatization of a state-owned company or a company in which the state is the majorityshareholder. The Government may hold one "golden" share which does not form part of theshare capital and whose holder does not receive dividends. The holder of the "golden" shareparticipates in the management of the JSC through the right of veto major decisions to bemade by general meetings, the board of directors and the executive body. A golden share canonly be held by the government for a specified period of time.

Termination

A JSC may be terminated in the following circumstances:

- By agreement of its shareholders; or- Under a court decision as provided by legislation, including for insolvency.

Termination may occur through reorganization or liquidation. Liquidation is carried out by aliquidation committee appointed by the general shareholder’s meeting, or in case ofinsolvency, by the courts.

6.3 Limited Liability Companies (LLC)

Establishment

A LLC is formed on the basis of a charter and a decision of its founders. Initial capital isprovided by contributions from shareholders and may take the form of cash or other propertyand property rights assessed in their monetary equivalent. LLCs may be founded by one ormore individuals or legal entities.


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LLCs must be registered with the state to acquire legal status, and if operating in mineralresources, banking and finance or media and communication sectors, may need approvalfrom the Government or Parliament. To register an LLC, the following documentation mustbe submitted to the State Registration Office and, as applicable, to the Foreign Investmentand Foreign Trade Agency (FIFTA):

- Application form and request letter;- Charter;- Document confirming the address;- Minutes of the foundation meeting;- Bank confirmation letter confirming the required minimum amount of owner’s equity

and the starting balance;- Letter from banking institution stating the shareholder has maintained its accounts in

good standing;- Feasibility study or business plan;- And documents confirming the identity of founders and payment of the required fee

for state registration.

The charter of an LLC should generally specify: full and abbreviated name of the company, thenumber of authorized shares, the number of issued and outstanding shares and the par value,the number of members of the Board of Directors (a Board of Directors is not mandatory forLLCs), procedures for foundation and competency and activity of the company’s bodies,including the procedure for convening general meetings, preparation for and holding ageneral meeting of shareholders and meetings of collective bodies, procedures for informingshareholders on the activities of the company, a list of governing positions within thecompany, start and end dates of the fiscal year of the company, etc.

The minimum amount of charter capital for a foreign invested LLC (BEFI) is USD 100,000,which must be paid prior to registration. There is no minimum amount of charter capital for aLLC with limited or no foreign investment (BELFI).

Shares and Rights

There are two types of shares - ordinary and preferred. There is no limit to the number ofpreferred shares that can be issued. The holder of an ordinary share has the right to vote atthe general meeting of shareholders and take part in the election of management bodies. Theholder of preferred shares has priority rights to receive dividends and also (as determined bythe company’s charter) to participate in prior distribution of property in the event ofliquidation. A holder of a preferred share has no right to take part in the management of aLLC, except for certain cases provided by law.

Shareholders may elect to distribute dividends if the company is solvent after suchdistribution. Dividends may be paid in monetary form, in property or in the form ofsecurities.

Termination

A company may be terminated in the following circumstances:

- By agreement of its shareholders; or- Under the court decision as provided by legislation, including for insolvency reasons.

Termination may occur through reorganization or liquidation. Liquidation is carried out by aliquidation committee appointed by the general shareholder’s meeting, or in case ofinsolvency, by the courts.


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6.4 Partnerships

There are two types of partnership set out in the Law on Partnerships: Limited and Unlimited.In a limited partnership, there is at least one partner who has unlimited exposure to theliabilities of the partnership and the rest have their liability limited to their capitalcontribution. In an unlimited partnership, the partners are jointly and severally liable for theobligations of the partnership, without limit to their capital contribution and personalproperty.

Partnerships are required to register with their local State Registration Office, are able totrade internationally and merge or be liquidated.

Partnerships are not a common structure for foreign investors given the inability to avoidunlimited liability for at least one of the partners.

6.5 Representative Offices

Under the Foreign Investment Law, foreign investors may establish representative offices,which are not separate legal entities, but rather an extension of their head office. Arepresentative office is only allowed to undertake representative functions and the protectionof the interests of its head office. Representative offices do not have charter capital and,accordingly, it is the head office that is legally responsible for liabilities to third parties.

The registration procedures for representative offices are similar to those for Mongolian legalentities. In addition to one or two agencies, depending on the type of activities, representativeoffices of a foreign entity are required to be registered with the FIFTA. The registration feesfor a representative office are considerably more than for a LLC.

6.6 Registration Process in General

The registration of new BEFI in Mongolia takes place at three agencies:

Foreign Investment and Foreign Trade Agency ; The State Registration Office ; and District Tax Office.

Currently the registration at these agencies takes place separately. Company registration forBEFIs begins with FIFTA. All BEFIs are issued a FIFTA certificate, which must be extendedon an annual basis. Registration at FIFTA will take approximately five business days.Registration then continues at SRO. During SRO registration the company must also registerwith the tax office of the district in which it is located, according to the company’s registeredaddress. The company must show proof of registration at the tax office to SRO beforeregistration can be completed. Registration at SRO takes an additional five days. Taking intoaccount registration document preparation, obtaining a chop, opening a bank account at aMongolian commercial bank, translation time and possible agency delays total registrationtime for a new BEFI is approximately four weeks.


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7. LABOUR RELATIONS AND SOCIAL SECURITY16

7.1 Labour Market

According to the World Bank, Mongolia’s unemployment rate was 4.4% as of March 2012.However, the unofficial unemployment rates are estimated to be much higher. The totalnumber of registered unemployed persons as of March 2012 is approximated 50,000.

7.2 Labour Relations

Labor relations in Mongolia are largely regulated by the Labor Law of Mongolia of May 14,1999.

7.3 Working Conditions

According to the Labor Law, employment contracts or employment agreements (determinedby position or by the type of work performed) define the terms of employment. Standardworking hours are 40 hours a week, with special provisions for seasonal shift work, such asthe extractive industries or agriculture. Salaries are established by the employerindependently but may not be lower than the minimum wage as established by Mongolianlegislation. The minimum monthly wage was adjusted in 2011 to MNT 140,400. Wages for askilled worker with English language skills and a degree from a Western university aresignificantly higher.

7.4 Social Security System

Citizens of Mongolia, foreign citizens and stateless persons employed on a contract basis by alltypes of economic entities, organizations, government, religious or other organizations andforeign economic entities carrying out activities in Mongolia are subject to the compulsoryinsurance, which is deducted from the gross salary

Employee rates are 10% but are capped at MNT 140,000 per month. Employer charges rangefrom 10% to 13% depending upon their industry and are not capped.

7.5 Foreign Personnel

All foreign employees, apart from employees of embassies or organizations set up throughspecial treaties, must be paid in Mongolian tugrik into tugrik bank accounts in Mongolia, perthe Law of Mongolia on Conducting Settlement in National Currency of July 9, 2009. Foreignworkers are free to transfer their salaries overseas.

Currently, work permits must be obtained for all foreign employees in companies andrepresentative offices. Obtaining work permits can be time-consuming, generally taking fourweeks before entry and an additional two weeks after entry. Before arrival a single entry workvisa must be applied for at any Mongolian embassy worldwide. Practice varies from embassyto embassy.

After entry the foreign worker must be registered within seven calendar days at theImmigration Office or face a fine of up to MNT 1,000,000. The application process for thework permit and visa will also continue after the employee enters. While provisional approvalfor a work permit must be applied for and obtained before entry, once the foreign worker hasentered an actual work permit must be obtained from the Labor Office of the Ministry of



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Labor and Social Welfare. A work place fee in the amount of MNT 280,000 per month of thework permit must also be paid in advance to the Labor Office.

Once the work permit has been obtained the single entry work visa must be extended to a longterm multiple entry visa. Additionally a long term residency permit must also be obtainedfrom the Immigration Office.

Individual (not corporate) shareholders or the registered Executive Director of a foreigninvested company do not need to hold work permits in order to work in Mongolia. Thesecategories of employees qualify for an Investor’s Card from FIFTA and the accompanying T-type visa and a long term residency permit. Holders of a T visa are not required pay the workplace fee.

The Government of Mongolia sets foreign worker quotas, for both locally owned and foreigninvested companies operating in Mongolia. Depending on the sector, the quota ranges from5% to 80%. The total amount of investment and total number of employees of a company willalso influence its quota. The default business activity of all foreign invested companies is“foreign trade” which attaches a quota of 5%. This means that a company must maintain 20Mongolian employees for every 1 foreign employee. Quotas may increase depending on thesector. For instance, companies having a mining or exploration license have a quota of 10%while a company extracting oil or natural gas may maintain a workforce comprised of foreignemployees up to 80%.

8. ACCOUNTING AND AUDIT REQUIREMENTS

8.1 Accounting

The State Ikh Khural (the Parliament) approved the Law on Accounting on 13 December2001. The fiscal year ends on 31 December. Entities should file their annual audited financialstatements with the relevant state regulatory agency by March 31, and must also submitquarterly financial statements by 20th of the following month in accordance with specificforms approved by Ministry of Finance.

Financial statements should be prepared in accordance with International FinancialReporting Standards (IFRS). Chief accountants of state owned companies or companies withstate ownership are required to hold a national CPA qualification.

8.2 Chart of Accounts

Currently, economic entities in Mongolia are required to apply the Chart of Accounts issued inDecember 2000 by the Ministry of Finance and Economy. NGOs have a similar butspecialized Chart of Accounts which was adopted in December 2005. Principally, the Chart ofAccounts sets the first two digits of balance sheet and profit/loss accounts which are to beused. Entities can decide on the number and arrangement of sub-divisions of account codesthemselves.

On 30 October 2003, the Bank of Mongolia (Mongolia’s central bank) adopted a Chart ofAccounts applicable for banking institutions, which sets the basic classification system to beused by banks for the purpose of their financial reporting and reporting to the Central Bank.

Government organizations have their own separate Chart of Accounts.


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8.3 Audit Requirements

In accordance with the Mongolian law on Auditing, the following organizations are requiredto have their financial statements audited in accordance with International Standards ofAuditing (ISAs):• Listed companies;• Companies applying for listing on the stock exchange;• Entities with total assets over over 50 million Tugriks;• Entities being restructured, liquidated, or intended to sell all its capital by auction;• If not otherwise stipulated by the law and international treaties of Mongolia, foreign

invested business entities and organizations (where foreign investment exceeds 25%);• Cooperatives conducting savings and loan disbursement activities;• Banking, financial and insurance organizations;• Securities companies carrying out brokerage and dealer activities and companies running

investment funds;• Funds described under Article 36, paragraph 2 of the Civil Code;• Political parties; and• Organizations similar to the business entities and organizations above.

Audit firms must be licensed by the Ministry of Finance of Mongolia to provide an auditreport for a Mongolian company and has to be registered with Financial RegulatoryCommittee of Mongolia to be able to audit insurance companies and listed/to be listedcompanies.

9. TAX SYSTEM AND ADMINISTRATION

9.1 Tax System

The National Tax Administration is comprised of the State administrative body (GeneralDepartment of Taxation) which is in charge of taxation, tax agencies and offices of capital city,province, district; and tax branches of soum and state tax inspectors.

9.2 Direct and Indirect Tax Burden

All taxes are subdivided into direct and indirect taxes. VAT and excise tax are recognized asindirect taxes.

9.3 Principal Taxes

Taxes on corporate income (including withholding tax and capital gains tax) Personal Income Tax Social Insurance Tax Value-added Tax Customs and Excise Duties Immovable Property Tax Mining Tax (license fees and royalties)

9.4 Legislative Framework

The main Tax laws are set out above also includes legislation governing specific types ofactivities:


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Law on Foreign Investment Law of regulation of Foreign Investment in Strategic Sectors; and Law on Minerals.

Despite several rounds of amendments of various legislation over the past few years, thelegislation remains in its infancy and complicated issues are not dealt with clarity.

Therefore, it is imperative to obtain advice on the interpretation, implementation and practiceadopted by the tax authorities as well as ensuring that the most recent legislation is beingconsidered.

9.5 Income Tax

Mongolian corporate income tax uses the progressive rate scale from 10%-25%: 10% should apply for annual income up to 3 billion Mongolian Tugrik ("MNT") (approx.

USD 2,2 million); and 25% should apply for any excess of 3 billion MNT.

Classes of Taxpayer

In general, Mongolian residents are taxable on their worldwide income whilst non residentsare only taxable on the Mongolian source income. This applies to both natural persons andlegal entities.

Taxable Income

Taxable income is defined as aggregate annual income less allowable deductions.

9.6 Tax Treaties

Mongolia has currently concluded Double Tax Treaties with 30 countries. In addition thereare five which are pending. For the list of Double Tax treaties, please see Appendix D.

There have been certain actions taken by the Government of Mongolia in the area ofinternational taxation and application of tax treaties. To initiate this, the Ministry of Financehas prepared a proposal to the Ministry of Justice and Ministry of Foreign Affairs to cancelsome at the DTTs that Mongolia currently has in force. The DDTs that have been identifiedare Netherlands, Luxembourg, UAE and Kuwait.

9.7 Tax Returns and Payments

Tax reports are compiled by the taxpayer, tax agent or their representative. The reports mustbe submitted in paper format and electronically and must be in Mongolian; supportingdocumentation must also be in, or translated into, Mongolian. Recently, the taxadministration started to implement an e-filing only system. From May 2012, entities areallowed to submit electronic tax reports once they obtain the e-signature.

9.8 Assessments

Tax reports, once submitted, are subject to an administrative check to ensure that they complywith the requirements for completing the report. A technical review of the tax position takenand the underlying documentation forms part of a tax audit which may be carried out in thefuture. Upon the conclusion of an audit the tax authorities will issue an ‘act’ setting out theirfindings.

9.9 Appeals


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Where a taxpayer objects to a decision of the tax inspector, the legal department of the taxadministration will investigate the dispute and give an opinion. In case the dispute cannot beresolved by the legal department, the case is reviewed by the Tax Dispute Council consistingof six persons and is chaired by the head of the Revenue Department of the Ministry ofFinance. If the taxpayer disagrees with the resolutions of the Council, the case can be taken tothe General Court.

9.10 Withholding Taxes

Mongolian entities are required to withhold tax on dividends, royalties to economic entitiesresident in Mongolia and just on royalties to individuals as dividends are exempt fromtaxation for individuals until 2013. In both cases the rate is 10%. Withholding tax is applied tothe gross proceeds on the sale of immovable property at 2%

Non-residents with no presence in Mongolia are subject to 20% withholding tax on incomeearned in the territories of Mongolia and on Mongolian source income. This covers thefollowing types:

Dividends; Interest; Royalties; Rental; Management and administrative expenses; Income goods, work or services provided in Mongolia; and Work or services provided directly or through electronic means.

9.11 Tax Audits

A tax inspector is empowered to examine financial documents connected with the payment oftaxes and ask or explanations. The official can temporarily seize documents which areevidence of tax avoidance and copy them.

9.12 Penalties

Interest, calculated on a daily basis for the period between the due date and for payment andthe actual payment date, and penalties are imposed on late payment of taxes. Flat ratepenalties also exist for the failure to comply with various administrative requirements.

9.13 Advance Tax Clarification

Rulings can be obtained from the tax authorities, but these are not legally binding.

10 TAXATION OF CORPORATIONS

10.1 Corporate Tax System

The Economic Entity Income Tax law governs the taxation of profits of:


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Mongolian economic entities; Foreign economic entities that have their headquarters in Mongolia; and Foreign economic entities that earn income in Mongolia other than via the above.

It is not currently possible for a foreign company to have a taxable presence in Mongolia.

10.2 Incentives

Tax incentives or benefits are available to the agriculture and mining industries. Foreigninvestors may obtain similar benefits where they meet minimum investment levels.

10.3 Taxable Income

Taxable income falls under the following three categories:

Income from activities which includes:a) Business activitiesb) Sale of shares and securitiesc) Gains on foreign currency exchange rates

Income from property which includes:a) Rentalb) Royaltiesc) Dividendsd) Interest

Income from the sale of property (both immovable and movable except for shares andsecurities).

The Mongolian corporate income tax rate is progressive rate and ranges from 10%-25%: 10% should apply for the first annual income of 3 billion Mongolian Tugrik ("MNT")

(approx. USD 2,2 million); and 25% should apply for any excess of 3 billion MNT.

Certain types of income maybe taxed at different tax rates.

Source of income Applicable tax rate

Dividends 10%

Royalties 10%

Interest 10%

Gambling, betting games and lotteries 40%

Sale of immovable property (gross) 2%

Sale of rights (gross) 30%

10.4 Deductibility of Expenses

General Expenses associated with the earning of aggregate annual income are deductible forcorporate income tax purposes (provided that they are properly documented). The taxlegislation provides a list of deductible expenses. Anything other than those is not considereddeductible.


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Interest Expenses Interest paid to third parties is deductible. Interest paid to a share holder issubject to a 3:1 debt to equity restriction. Further restrictions apply to interest on loans madefrom a Mongolian individual who controls the entity.

Depreciation Depreciation, for tax purposes, is calculated using the straight line method overthe useful economic life of the asset. This depends upon the nature of the asset, ranging from3 years for IT equipment to 40 years for buildings and constructions.

Disallowable expenses Generally expenses need to be specifically stated as deductible so thereare not many expenses stated as specifically disallowable. However the following are notdeductible for tax purposes: Finance lease payments; Fines and penalties; Expenses incurred for earning exempt income; Expenses not documented by the taxpayer; and Payments from which tax is not withheld but required to be withheld.

10.5 Related Party Transactions

In general, transactions are valued for tax purposes at the contact value. Where transactionstake place between related parties above or below this value, the tax authorities have the rightto alter the value used at an arms length basis.

The CIT Law of Mongolia specifies and determines related parties as follows:

If a party holds at least 20% of the common stock of another party; If a party has the right to receive at least 20% of dividends or distributions; or If a party has the right to appoint at least 20% of management or otherwise able to

determine its policies.

However the General Tax Law provides another definition on the “related parties” that isbased on ability to participate in management and can be used in addition to the abovedefinition.

10.6 Foreign Exchange

Income and expenditure in foreign currencies should be translated into MNT on the date ofthe transaction. Realized gains and losses from foreign currency exchange rates are taxableand deductible respectively.

10.7 Losses

Losses can be carried forward for up to two years and use of such losses is restricted to 50% ofthe taxable profit in any year for economic sectors other than mining and infrastructure.

For mining and infrastructure sectors losses can be carried forward for fourto eight yearsdepending on the investment amount and the whole taxable profit can be offset in a year (no50% limit applies).

10.8 Tax Computations

Taxpayers should submit quarterly and annual returns to the tax authorities by the 20th of themonth following the end of each quarter and 10th February for the annual return.


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Based on these, the tax authorities issue monthly/quarterly payment schedules and paymentsmust be made by the 25th of each month.

In practice the Mongolian tax authorities allow concessions as follows: A company with annual taxable income of less than MNT 500,000 may pay tax on a

quarterly basis; or Where total tax paid exceeds the tax liability, the excess can be credited against other

taxes due or credited against future tax payments. It may also in theory be refunded;practice here is less clear and consistent.

Withholding taxes must be paid within seven to ten days of the underlying payment(depending upon the nature of the payment) and taxpayers should prepare quarterly andannual returns for submission to the tax authorities by the 20th of the month following the endof each quarter and 10th February for the annual return.

10.9 Other Taxes

Excise Tax

Excise tax is levied on goods manufactured in or imported into Mongolia such as tobacco,alcohol, gasoline and diesel fuel and passenger vehicles. Recent uncertainty over internationalsupplies of gasoline and diesel fuel has lead to variations in the levy. Excise tax is alsoimposed on the physical units of special purpose technical devices and equipments used forbetting games and gambling and activities of individuals and legal entities that conduct suchactivities.

Immovable Property Tax

Immovable property tax is levied at 0.6% of the value of the immovable property. For taxpurposes, the value used is the value registered with the government registration authority. Ifthe property is unregistered, the insured value is used. In the absence of either a registered orinsured value, the accounting value is used. From 1 January 2013, the immovable property taxwill be 0.6% -1% of immovable property value depending on the size, location, and marketdemand etc.

Stamp Duty

Stamp duty is imposed on the following under the Law of Mongolia on State Stamp Duties:

Monitoring of and decisions on matters of legal status by a court of law; Registration of business entities and organizations; Permission to register business entities with foreign investment and allowing persons

to be employed with representative offices of foreign organizations; Permission to carry out services and carry out production which requires special

permission or expertise; Grant of certification for copyright, patent or trademarks; Registration of copyrights; Granting of permission to carry out activities in respect of securities and registration

of securities, and for authorization to issue and register securities; Other services.

The amount of duty varies according to the type of services/transaction involved.

Customs Duty


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A flat customs tariff of 5% applies in respect to most goods imported into Mongolia, except forinformation technology, medical equipment and pure bred livestock, which are zero rated.Certain equipment imported by small and medium size enterprises ("SME"), are exempt fromcustoms tariff.

Export duties apply to certain exported goods such as waste iron, aluminum, copper, brassand indentured cashmere.

Air Pollution Payment

The Law on Air Pollution payments came into effect from July of 2010. Produced raw coal,used or imported organic solvents and vehicles are subject to this payment.

10.10 Branch vs Subsidiary

It is not currently possible to establish a branch of a foreign company in Mongolia. Steps areunderway at the Mongolian Tax Authorities to allow Permanent Establishments to register astaxpayers. As at the date of publishing, the final details have not been published.

10.11 Group Taxation

There are no rules permitting grouping for tax purposes in Mongolia.

10.12 Special Taxation Regimes

Foreign Investment

A foreign investor investing certain level may apply for a stability agreement to govern theirinvestment, providing stable tax conditions to their investment for a fixed term.

Currently an investment of up to USD 20m will permit a 10 year term and a USD 50minvestment a 15 year term.

Mining

A mining stability agreement covers tax stability and other business rights. The minimuminvestment refers to the amount invested over the first five years of the project and willprovide stability for a fixed term as follows:

USD 50m for ten years; USD 100m for fifteen years; and USD 300m for thirty years.

All exploration costs should be capitalized and then amortized on a straight line basis over thelife of the mine following the commencement of production. License acquisition costs areamortized over the life of the license.

Mining and Exploration License Fee

This varies for exploration and mining licenses. Mining license fee is agreed up front andstated in the mining license. Exploration license fees are based on the number of years ofexploration.

Royalty Fees


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Royalty fees are paid on the sale of mining products. The rate depends on the product beingmined as well as the amount of value added services being performed in Mongolia.

Amendments were made to the Law on Minerals that came into effect from January 1, 2011.The changes mainly focus on imposing additional royalties based on the market price increaseof mining products as well as the amount of value added services being performed inMongolia.

11. TAXATION OF INDIVIDUALS

11.1 Territoriality and Residence

A permanent resident taxpayer of Mongolia is subject to tax on his/her world-wide income.A non-resident taxpayer of Mongolia is subject to tax on the income earned in the territory ofMongolia in a tax year.

A permanent resident taxpayer of Mongolia is:

An individual who owns a residence in Mongolia; or An individual who resides in Mongolia for 183 or more days in a tax year.

A non-resident taxpayer of Mongolia is:

An individual who has no residence in Mongolia and has not resided in Mongolia for 183or more days in a tax year.

11.2 Gross Income

Employee Gross Income

All direct and indirect income received through employment or related activities during acalendar year. This includes both taxed and untaxed income at the source of payment.

Capital Gains and Investment Income

Gross income from sale of immovable property is taxed at a rate of 2%. Gain from the sale ofmovable property including securities is taxed at a rate of 10%.

Dividends and interest income earned by individuals is generally subject to tax at the rate of10%, withheld at source. The tax on Dividends and Interest will not come into force until 1Jan, 2013.

11.3 Deductions

Business Deductions

There are no business deductions allowed for employees. An individual may claim businessdeductions if registered as an entrepreneur.


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Social insurance charges are deductible for PIT purposes.

Non-Business Expenses

There are no deductions for non-business expenses.

Personal Allowances

The most notable allowance is a general deduction wage of 84,000 Mongolian Tugrik("MNT") per annum (approx. USD 62).

11.4 Tax Credits

A credit is available for individuals who have suffered tax in other countries under the termsof a Double Tax Treaty.

Tax credits are also available for agricultural production and educational fees.

11.5 Other Taxes

Social Security Taxes

Citizens of Mongolia, foreign citizens and stateless persons employed on a contract basis by alltypes of economic entities, organizations, government servants, religious or otherorganizations and foreign economic entities carrying out activities in Mongolia are subject tothe following compulsory insurance:

Pension insurance (employer: 7% employee: 7%); Benefit insurance (employer: 0.5 %; employee: 0.5%); Health insurance (employer: 2%; employee: 2%); Industrial accident and occupational disease insurance (employer: 1% to 3%); and Unemployment insurance (employer: 0.5%; employee: 0.5%).

Employee deductions are capped at MNT140, 400 per month (USD 104). Employer paymentsare not capped. These charges are deductible for CIT purposes.

Social Insurance and Health insurance returns should be submitted electronically and bypaper before 5th of the following month on a monthly basis. Payments should be also made by5th of the following month to the account of the Social Insurance Fund.

Obligatory Pension Contributions

Included in the Social Security Taxes.

Wealth Tax

There is no wealth tax in Mongolia.

Local Taxes

There are no additional local taxes on income.

11.6 Tax Administration

Assessment


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The following types of income are subject to withholding tax:

Employment income; Interest; Royalties; and Dividends.

Please note that dividends and interest are exempt from taxation including withholding taxuntil 1 January 2013.

Returns

A withholder shall submit a quarterly report of tax withheld by the 20th of the first month ofthe following quarter and the annual tax report by February 15 of the following year to thecorresponding tax authority.

Income not covered by the above should be reported on the annual tax return which must bebe submitted to the tax authorities by 15th February following the end of the tax year which isthe calendar year .

Payment of Tax

Tax withheld should be paid to the tax authorities by the 10th of the following month.

Tax on other income should be paid by the 15th of the first month of the following quarter.

11.7 Tax Rates

Source of income Applicable tax rateEmployment income 10%Business and professional incomeIncome from property, i.e. dividends, royalty, interest, capital gainfrom sale of securities/stocksSale of immovable property (gross) 2%Income from scientific, literacy artistic works, inventions, product;designs and useful designs (gross)

5%

Designs and useful designs (gross)Income from sports competitions, artperformances, and similar income (gross)Income from betting games, gambling and lotteries (gross). 40%

12. VALUE ADDED TAX (VAT)

12.1 Introduction


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VAT at the rate of 10% is imposed on the supply of taxable goods and services in Mongolia,and on imports into Mongolia.

Taxpayers are required to register for Mongolian VAT purposes when their taxable turnoverexceeds 10 million MNT (USD 7.4K). Taxpayers may also voluntarily register when theirtaxable turnover reaches 8 million MNT (USD 5K) or if they have invested more than USD 2min Mongolia. We understand that at the time of publication, the MTA is considering increasingthe VAT registration threshold to MNT 50m (USD 37k).

12.2 Scope of VAT

VAT is levied on the following in Mongolia:

Work performed and services rendered in Mongolia; Goods sold in Mongolia; Goods imported into Mongolia to be sold or used; and Goods exported from Mongolia for use or consumption outside Mongolia.

The provision of services also includes the following:

To provide electricity, heat, gas, water, sewer, postal, communications, and otherservices;

To lease goods or allow one to possess or use them in other forms; To rent out rooms in hotels or similar places or allow one to possess or use them in

other forms; To rent out rooms in houses or buildings or allow one to possess or use them in other

forms; To lease immovable and movable property other than houses and buildings or allow

one to possess or use them in other forms; To transfer, lease, or sell innovations, product designs, useful designs, copyrighted

works, trademarks, know-how, and information on assets; To issue lotteries, operate quizzes or gambling or provide intermediary services; To pay off debts by performing work or providing services; The performance of work or provision of services from a non-resident to a resident;

and To pay interest and fines to others due to misconduct.

The sale of goods also includes the following:

Sale of right to conduct economic activity; Retention of assets upon the termination of trade; Settlement of a debt with goods; and Sale by a non-resident to resident.

12.3 Zero-Rating

The following are zero-rated for VAT purposes:

Export sales of goods; International transportation services; Services provided outside Mongolia; Services provided to a foreign citizen or legal entity not present in the territory of

Mongolia during the provision of services (including tax-exempt services);


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Services provided to domestic or international aircrafts conducting internationalflights;

State medals and coins produced domestically; and Export of finalized mining products. (processed rather than raw materials).

12.4 Exempt Supplies

The following goods shall be exempted from VAT:

Passengers personal items in amounts approved and permitted by the customsauthority for tax-free entry;

Goods imported for the use of foreign diplomatic missions or their officials residing inthe territory of Mongolia on a permanent basis;

Humanitarian and non-repayable aid goods; Custom appliances for developmentally challenged persons; Weapons and special equipments imported for armed forces, police, and state

security and judicial enforcement agencies; Civil aviation aircrafts and spare parts; Income from sale of an apartment and its part used for residential purposes; Equipments, materials, raw materials, spare parts, gasoline and diesel fuel imported

for the purpose of oil exploration, extraction, and use under a product-sharingagreement entered with government in the oil industry;

Blood, blood products, and organs for medical treatment purposes; Gaseous fuel and its containers, equipments, custom machinery, mechanisms, tools,

and spare parts; Mongolian currencies printed in foreign countries by orders; Gold sold; Newspapers sold; Products resulting from scientific research Mining products other than those zero rated; Certain types of loans; Raw coal; Used or imported organic solvents, vehicles; Produced or planted cereals; Processed meat; and Milk and milk products, etc.

The following services shall be exempted from VAT:

Currency exchange operations; Banking transactions; Insurance and property registration; Transactions in stocks and securities; Loans; Transactions concerning issuance and transfer of interest for placement of monetary

assets of social and health insurance funds; Residential accommodation; Educational services; Health services; Services of religious organizations; State services; Public transport; and Some services to tourists.


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Goods, work, or services provided free of charge, or used for personal purposes other than forproduction, shall not be exempted from value.

12.5 Taxable Amount

VATable Supplies

In general, the taxable amount is the fair market value of the goods sold, work performed orservices provided.

For imported goods, this should include customs duty, excise tax and other such taxes to thecustoms value of the goods. There are a number of methods for establishing the customsvalue; transportation, insurance and any commission or royalty amounts are included.

Taxpayers should account for VAT on goods, work or service obtained from non-residents.

Transactions in a foreign currency are required to be translated into MNT at the rate applyingon the tax date of the transaction.

VAT Offset

VAT paid for goods, work or services can be offset against VAT payable to the Budget; thismust be substantiated by documentary evidence. This can only be done once a company hasregistered for VAT.

Pro-rating is required where VAT is incurred partially for exempt and partially VATablepurposes to facilitate a recovery of the VAT Input Tax

VAT Calculation and VAT Offset Carry-Forward

The VAT liability of a taxpayer comprises Output VAT (i.e., VAT charged by a taxpayer) lessInput VAT (i.e., VAT paid by a taxpayer to its suppliers) in a reporting period.

The excess of input VAT over output VAT may generally be carried forward against futureVAT liabilities or offset against other tax liabilities. In practice refunds are difficult to obtain,although the rules do prescribe a procedure for refunds under certain conditions.

Reverse Charge VAT and Offset

Mongolian companies are required to account for Reverse Charge VAT (also known as self-charge) on services received and goods / equipment bought from foreign entities.

Recent amendment in the VAT law stipulate that Reverse Charge VAT withheld by Mongolianresidents on services provided, work performed and goods imported by non-residents shouldnot be allowed for offset against Output VAT by the Mongolian taxpayer. As at the date of thispublication, a number of taxpayers have challenged this in the Courts of Law, and theoutcome has not been determined

12.6 Non-Deductible Input VAT

Value-added tax paid in the course of import or purchase of the following goods, work orservices shall not be eligible for credit against total value-added taxes due by a buyer:

Automobiles and its components and spare parts; Goods or services purchased for personal or employees’ use; and Goods, works, or services imported or purchased for specific production purposes.


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12.7 VAT Incentives

A number of VAT exemptions have been introduced outside of the law on VAT. These aretargeted at specific industries as well as specific projects which have been funded byinternational institutions (such as the World Bank) or foreign governments.

12.8 VAT Simplification

Group reporting for VAT is possible.

12.9 VAT Compliance

VAT is accounted for on a monthly basis and paid by the 10th of the following month. Returnsmust be submitted by the 15th of the month and records should be kept for 6 years.


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PRICEWATERHOUSECOOPERS IN MONGOLIA

Ulaanbaatar:

Contact Names Address Communications

Carolyn ClarkeManaging [email protected]

Alexey FegetsynAudit and Assurance [email protected]

Tsendmaa ChoijamtsExecutive Tax [email protected]

Gurdeep SinghTax [email protected]

Johanna CaveCapital Market and Deals [email protected]

Bayarmaa DavaaExecutive Audit [email protected]

Boldbaatar OchirsurenAudit and Assurance [email protected]

PricewaterhouseCoopersAuditLLCCentral Tower6th floor, Suite 601Sukhbaatar Square, SBD-8Ulaanbaatar 14200Mongolia

Main office numbersTel: +976 (11) 329089Fax: +976 (11) 322 068


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APPENDIX A - Macroeconomic Indicators of Mongolia

GDP growth (2011): 17.2%

Inflation (2011): 9.7% (2011)

Policy rate of Central Bank: 11% per annum

Gross official int'l reserves: USD 2,544.28 ml (June 2011)

Country rating:S&P – BB- (March 2012)Fitch – B+ (March 2012)

Currency: Mongolian Tugrik (MNT)

Exchange rate: MNT 1,356 = USD1 (1 August 2012)


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APPENDIX B – Tips for Business Visitors

Visas

Mongolia requires visa to travel to the country, with a few exceptions, including the UnitedStates and several Asian countries. While there are a variety of visas, the application processis generally quite easy. Application can take place at any Mongolian embassy worldwide andnot necessarily in the home country of the applicant. The application at an embassy generallytakes 3-5 business days. Mongolian embassies do not follow standard procedure and oftenhave their own rules and regulations, often requiring different paperwork and issuing visas fordifferent terms. For example, while some embassies may only issue single entry work visas,others will issue yearlong multiple entry work visas. Single entry visas are approximatelyUSD30 while yearlong visas are approximately USD130. Again, this fee structure varies fromembassy to embassy. For exact details it is advised to contact your local Mongolian embassy.

Transit visas are necessary for passengers traveling by train through Mongolia, according tothe Mongolian Law on the Legal Status of Foreign Citizens, but a specific time period is notgiven. Passengers traveling via international flights may transit Mongolia for a period of 24hours without a visa.

According to Immigration officials it is possible to obtain a visa on arrival if the traveler’shome country does not have a Mongolian embassy or consulate. This is only the case for atourist or a business visa and not applicable to work visas. Prior approval must be obtainedfrom the Immigration Office in Ulaanbaatar, which will then send an approval letter to theairport.

When obtaining a visa through a Mongolian embassy or consulate, an invitation from a hostorganization in Mongolia, a passport photos and the completed application form (whichshould be available from the embassy) are usually required. Passports should be valid for atleast three months from the end of the visa period. Upon receipt of the visa, confirm that thedates in the visa are correct and cover the period of stay.

Travel

Five airlines fly to Chinggis Khan International Airport in Ulaanbaatar and, together, give thetraveler the opportunity to fly to and from Mongolia on every day of the week. Flights toUlaanbaatar under the current schedules are:


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Two national air carriers, Eznis Airways and Aero Mongolia, operate domestic flights inMongolia as well as near destinations such as Ulan-Ude in Russia and Huh Hot in InnerMongolia(China).

Customs

Currently, customs declarations are required if items to be declared exceed USD 1,000,and/or more than USD 5,000 in cash, which must be accompanied by confirmation from thetraveler’s banking institution confirming the money was withdrawn from the bank. Thecustoms declaration describes the currency and amount of money, valuables, and other itemsbeing imported. If a customs declaration is submitted, both forms would be stamped and onewill be returned. The one that is returned must be submitted upon departure from Mongoliatogether with a departure declaration. The departure declaration again requests informationconcerning money and valuables being exported from the country. Typically, the authoritiesseek to confirm that valuables were not sold and that more money is not being taken out ofthe country than was brought in. Individuals are not permitted to take more than USD 5,000cash out of the country.

Registration

Within seven days of arrival in Mongolia, including weekends, the traveler must register withthe Immigration Office if the person will stay in Mongolia over 30 days. Failure to do so mayresult in a fine upon departure of up to MNT1,000,000. The registration stamp is dated fromthe date of registration. Deregistration is not necessary.

Airlines Flights to UlaanbaatarMIAT (Mongolian Airlines) From:

Beijing: 7 days a week

Berlin via Moscow: Thursday, Sunday (27 March-28

Oct), Tuesday (until August 31), Saturday (until Sept

10)

Moscow: Thursday, Sunday (March 27-Oct 28)

Seoul: 7 days a week

Tokyo: Monday, Tuesday, Wednesday, Saturday and

Sunday under summer schedule (direct flights);

Monday and Friday under winter schedule (via Seoul)

Osaka: Tuesday, Friday (Jul-Sep)

Hong Kong: Monday, Wednesday, Thursday, Friday

and Sunday(Summer schedule)

Aeroflot, Moscow 21 Jun - 20 Sep: 7 days a week

From 21 Sep: Tuesday, Friday and Sunday

(03 Jun - 28 Oct: also on Thursday)

Air China, Beijing 7 days a week (summer schedule)

Korean Air, Seoul 7 days a week (summer schedule)

Turkish Airline, Istanbul Tuesday, Thursday and Saturday (summer schedule)


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Accommodations

There are a number of business quality hotels in Ulaanbaatar. The Corporate Hotel,Kempinski Hotel Khan Palace, Ramada and Chinggis Khaan Hotel are newer hotels in thecentre of town. The Bayangol Hotel, Ulaanbaatar Hotel and The Blue Sky hotel are alsocentrally located. The Terelj Hotel is a five star hotel situated in Gorkhi-Terelj National Park,ca. 50 km from the city.

BAYANGOL HOTEL

Rates: USD 110-400 (include 10% VAT)Breakfast is includedTel: +976-11-312255Fax: +976-11-326880

BLUE SKY HOTEL

Rates: USD 208-425 (10% VAT included)Breakfast is includedTel: +976-70100505

CHINGGIS KHAAN HOTEL

Rates: USD 125-650Tel: +976-11-313380Fax: +976-11-312788

CORPORATE HOTEL

Rates: USD 170-850 (10% VAT included)Breakfast is includedTel: +976-11-334411Fax: +976-11-334422

KEMPINSKI HOTEL KHAN PALACE

Rates: USD 98-518 (10% VAT included)Breakfast is includedTel: +976-11-463463Fax: +976-11-463464

RAMADA HOTEL

Rates: 150-270 USD (10% VAT included)Breakfast is includedTel: +976-7014-1111Fax: +976-7010-7777

TERELJ HOTEL

Rates: 110-3250 USD (10% VAT and 5% Service charge excluded)Breakfast is not includedPhone: +976-99992233Fax: +976-7011-0067Email: [email protected]


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ULAANBAATAR HOTEL

Rates: USD 110-1350 (10% VAT included)Breakfast is includedTel: +976-11-320620, +976-70116688Fax: +976-11-324485

Ulaanbaatar

Ulaanbaatar is the capital and largest city with a population of over one million. Located inthe north central part of the country, the city lies at an elevation of about 1,310 meters(4,300 ft) in a valley on the Tuul River. It is the cultural, industrial, and financial heart of thecountry. It is also the center of Mongolia's road network, and connected by rail to the Trans-Siberian Railway and the Chinese railway network.

Due to its high elevation, relatively high latitude, location hundreds of kilometres from anycoast, and the effects of the Siberian anticyclone, Ulaanbaatar is the coldest national capital inthe world, with a monsoon-influenced, subarctic semi-arid climate (Köppen climateclassification BSk) with brief, warm summers and long, very cold and dry winters.Precipitation, at an annual total of 216 millimeters (8.50 in) is heavily concentrated in thewarmer months. It has an average annual temperature of −0.7 °C (30.7 °F).

Drivers / Car rental

To ensure safe and comfortable trips in and outside Ulaanbaatar, we recommend businesstravelers to hire an experienced and reliable driver with a reliable car. Drivers are also anecessity for foreign business people in Ulaanbaatar as business hours in Mongolia can belong and sometimes irregular. For travels outside Ulaanbaatar jeeps with four-wheel drive arenecessary, since most of countryside roads are not paved. Drivers with cars are most easilyand reliably hired through the inviting organization. Very few drivers speak English or anyother western European languages, however, more and more do understand directions andone should be able to communicate without a translator.

It is possible to hire a car with a driver from Sixt Mongolia (Tel/ Fax: +976-7011 0304(Central Branch), +976-7011 8482 (Chinggis Khaan Hotel Branch), e-Mail: [email protected]).Rates start from USD 64 a day for a short-term rental.

Interpreters

Although many business people and government officials in Mongolia speak English, theyconduct most meetings in Mongolian. In business negotiations even with English-speakingMongolian counterparts, foreign business people sometimes find an interpreter useful.Interpreters could be best arranged through the inviting organization. The cost isapproximately USD 100 per day. Outside Ulaanbaatar few Mongolians speak a foreignlanguage.

Appointments

Appointments are generally kept in Mongolia unless there is a good reason for breaking them.However, in the business climate in Mongolia, meetings can be frequently cancelled becauseother issues become even more urgent. Therefore, one should try not to scheduleappointments more than two days in advance. If possible, confirm the appointment an hourbefore arrival.


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Working Hours

Standard working hours are nine to six, five days a week, with most people working a 40-hourweek. Shops tend to be open later on weekdays and on Saturday, while most are also open onSunday. Most offices close for an hour or so during the day between one and two p.m. forlunch. Banks and shops are usually open during lunch-break time.

Currency

Mongolia has a cash and, increasingly, a credit economy. Plan to have cash (Tugrik) in theevent that your credit card does not work at the restaurant or shop.

There are many foreign exchange points around, but it may be more reliable to use the banksor the hotels, where possible, since rates and security measures vary across the country. Whenchanging money, worn or damaged bills should be avoided as most places accept only bills ingood condition.

Automated teller machines (ATMs) can now be found in more and more places inUlaanbaatar. ATMs typically dispense local currency and usually offer a reasonable exchangerate.

Public holidays

Before investing in a round-trip ticket to Ulaanbaatar, it is prudent to be aware of thefollowing official Mongolian public holidays:

2 days between the end of January and earlyMarch (dates vary every year)

Tsagaan Sar (Lunar New Year)

March 8 International Woman’s DayJune 1 Mother and Child DayJuly 11-13 Naadam (Mongolian national holiday)November 26 Constitution Day

Christmas and Easter are not public holidays in Mongolia. Also, please be aware thatapproximately one week after the two-day Tsagaan Sar holidays as well as during summerholiday period (usually July-August) it might be difficult to meet business people and officialsin Mongolia.

Safety

In any city where disparities in income levels are large, crime tends to be targeted at the(comparatively) wealthy and Mongolia is no exception. Violent muggings are rare but dooccur. Petty crime is common in Ulaanbaatar, particularly in markets or other crowded publicplaces. Watch out for pickpockets.

Foreign visitors are advised not to dress in a flamboyant fashion and to be discreet in theirconduct. It is also recommended to drink in moderation and to exercise caution when leavingnightclubs and discos late at night. In particular, use known taxis or arrange for a hotel orcompany car to pick you up. Hotel safes should be used, where possible, to avoid carryingexcess sums of cash.

Ulaanbaatar is no different to many other big cities and care should be taken walking alone,especially at night, and in dealing with people who approach you in the street. When stayingin a hotel room or apartment, never open the door for anyone who is unfamiliar.


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While in a car, consider locking the doors as soon as you get in and keeping windows closedeven if temperatures are high. Avoid driving late at night, especially in deserted areas. Alwaysbe alert in public places. If you are uncomfortable or suspicious of the situation, do nothesitate to alter your plans or route.

Traditions

Mongolia is a fascinating country with a deep and varied culture. The Mongols are oftenconsidered to be one of the founding ancient civilizations of the world and many of thetraditions, customs and etiquette true at the time of Gengghis Khan are still true today. Aswith any other civilizations, customs and beliefs are different than in other parts of the world,it is advisable that as a visitor to Mongolia you abide or at least try to understand the localcustoms, traditions and beliefs so that you may better understand the country as a whole. Thetraditions and beliefs of the Mongolian People are far too numerous to list all in here but heresome suggestions to start with. As Mongolians are tolerant and friendly people, they will notexpect you to be familiar with all their customs.

Mongolians are sensitive to outward appearance and neat appearance is muchappreciated. This can of course be problematic if you have travelled over hugedistances and are feeling a little drained, but it is worth remembering.

As Mongolians were all originally nomads, hospitality is seen as extremely importantand there are some points to remember in connection with this. The first concernsfood and drink: When you are offered something to eat or drink, always accept. If inreality you are not keen on eating or drinking that particular thing, take a nibble orsip, then put it down. It is considered rude to refuse outright. Similarly try not toshow any negative feelings too openly if what has been offered is not to your taste.This also applies to being offered a shot of vodka: a touch to the lips will suffice if youdo not want to drink.

Be careful when visiting people's tents: Mongolians are keenly aware of theirtraditions, and there are many traditions concerning gers. Try to familiarise yourselfwith some of these traditions. The first of these is that it is considered unlucky to stepon the door-step of the door-frame to the ger. The second is that guests should moveto the left of the fireplace on entering the tent, and the host will indicate a suitableplace to sit. If you have rented your own ger, then you are of course free to do as youwish.

Attractions

Even though business in Mongolia can be time consuming, your schedule may allow you tosee something of the city. Here are some ideas for Ulaanbaatar:

Monasteries

Among the notable older monasteries is the Choijin Lama Monastery, a Buddhist monasterythat was completed in 1908. It escaped the destruction of Mongolian monasteries when it wasturned into a museum in 1942. Another is the Gandan Monastery, which dates to the 19thcentury. Its most famous attraction is a 26.5-meter-high golden statue of Migjid Janraisig.These monasteries are among the very few in Mongolia to escape the wholesale destruction ofMongolian monasteries under Khorloogiin Choibalsan.

Bogd Khan’s Winter Palace

Old Ikh Khüree, once the city was set up as a permanent capital, had a number of palaces andnoble residences in an area called Öndgiin sürgiin nutag. The Jebtsundamba Khutughtu, who


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was later crowned Bogd Khan, had four main imperial residences, which were locatedbetween the Middle (Dund gol) and Tuul rivers. The summer palace was called Erdmiin dalaibuyan chuulgan süm or Bogd khaanii serüün ord. Other palaces were the White palace(Tsagaan süm or Gьngaa dejidlin), and the Pandelin palace (also called Naro Kha Chod süm),which was situated in the left bank of Tuul River. Some of the palaces were also used forreligious purposes. The only palace that remains is the winter palace. The Winter Palace of theBogd Khan (Bogd khaanii nogoon süm or Bogd khaanii öwliin ordon) remains as a museum ofthe last monarch. The complex includes six temples, many of the Bogd Khan's and his wife'spossessions are on display in the main building.

Museums

Ulaanbaatar has several museums dedicated to Mongolian history and culture. The NaturalHistory Museum features many dinosaur fossils and meteorites found in Mongolia. TheNational Museum of Mongolian History includes exhibits from prehistoric times through theMongol Empire to the present day. The Zanabazar Museum of Fine Arts contains a largecollection of Mongolian art, including works of the 17th century sculptor/artist Zanabazar, aswell as Mongolia's most famous painting, One Day In Mongolia by B. Sharav.

Pre-1778 artifacts that never left the city since its founding include the Vajradhara statuemade by Zanabazar himself in 1683 (the city's main deity kept at the Vajradhara temple), ahighly ornate throne presented to Zanabazar by the Kangxi Emperor (before 1723), asandalwood hat presented to Zanabazar by the Dalai Lama (c. 1663), Zanabazar's large furcoat which was also presented by the Kangxi Emperor and a great number of original statuesmade by Zanabazar himself (e.g. the Green Tara).

Puzzle Toys Museum displays a comprehensive collection of complex wooden toys to beassembled by players using sophisticated methods.

Opera House

The Ulaanbaatar Opera House, situated in the center of the city, hosts concerts and musicalperformances.

Sukhbaatar Square

Sukhbaatar Square, in the government district, is the center of Ulaanbaatar. The square is31,068 square meters in size. In the middle of Sükhbaatar Square, there is a statue ofDamdinii Sukhbaatar on horseback. The spot was chosen because that was whereSukhbaatar's horse had urinated (a good omen) on July 8, 1921 during a gathering of the RedArmy. On the north side of Sükhbaatar Square is the Mongolian Parliament building,featuring a large statue of Chinggis Khan at the top of the front steps. Peace Avenue (EnkhTaivny Urgon Chuloo), the main thoroughfare through town, runs along the south side of thesquare.

Zaisan Memorial

The Zaisan Memorial, a memorial to Soviet soldiers killed in World War II, sits on a hill southof the city. The Zaisan Memorial includes a Soviet tank paid for by the Mongolian people anda circular memorial painting which in the socialist realism style depicts scenes of friendshipbetween the peoples of Soviet Union and Mongolia. Visitors who make the long climb to thetop are rewarded with a panoramic view of the whole city down in the valley.

National Sport Stadium

National Sports Stadium is the main sporting venue. The Naadam festival is held here everyJuly.


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Surroundings

Gorkhi-Terelj National Park, a nature preserve with many tourist facilities, is approximately70 km from Ulaanbaatar and accessible via paved road.Sky Resort, Mongolia's first dedicated ski area is located 13 km (8 mi) from Ulan Bator andopened in 2009. The resort has 9 runs of varying difficulty, and 7 lifts. It is located on BogdKhan Uul.

Education

The American School of Ulaanbaatar, the International School of Ulaanbaatar, the EliteSchool and the British School offer Western-style K-12 education in English for Mongoliannationals and foreign residents.

There are also a number of state and private local schools with instruction in Mongolian(partly in English in some private schools). The standards can be high, but the number ofexpatriate children in such schools is small.

Health Care

More often than not, a change in diet and partaking of the local custom, vodka, is the cause ofstomach complaints in Mongolia. The treatment usually requires a few days for acclimation.Although Mongolian citizens may believe that water out of the tap is drinkable, it is notrecommended. Bottled water and soft drinks are readily available at stores and kiosks.

While Mongolia is presently not known for any particular diseases, travelers planning tospend extended periods of time in the country should make sure that they are up to date withdiphtheria, hepatitis, rabies, tetanus, and typhoid vaccines. Even for short visits, it is stronglyadvisable to be appropriately vaccinated. Inoculation regulations can change at short notice.Consult a doctor or a travel clinic before traveling to Mongolia, allowing time for vaccinationseries.

Foreigners are advised to bring ample supplies of required medications for their use in anemergency, as the medicine supply in Mongolia tends to differ from what foreigners are usedto in their home countries.

Health care facilities available to foreigners are limited. All Mongolian hospitals are very shortof most medical supplies, including basic care items, drugs and spare parts for medicalequipment. Doctors and hospitals may expect immediate cash payment for health services.Visitors are urged to have health insurance including cover for evacuation to Seoul and to takeany regular medication with them.

For emergency care contact:

SOS Medica Mongolia ClinicTelephone: +976-11-464325/26/27 Fax:+976-11-454537For after hour emergencies: Cell phone: +976 9191 3122 (mongolian) +976 9911 0335(english)E-mail: [email protected]: www.sosmedica.mn


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APPENDIX C – Tax Rates

CIT 10% for the first 3billion MNT (USD 2,2m approx)25% thereafter10% for investment income (royalties, dividends, interest)Varying rates for other specific types of income

Tax Depreciation Straight line over useful economic life: 3 to 40 years.

Withholding Tax Residents 10%Non-residents 20%

Personal Income Tax 10%Varying rates for other specific types of income

VAT 10%

Immovable Property Tax 0.6%0.6% -1% from 1 January 2013


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APPENDIX D – Double Tax Treaties

Current

AustriaBelgiumBulgariaCanadaChina (P.R.C.)Czech RepublicFranceGermanyHungaryIndiaIndonesiaKazakhstanKorea (R.O.K.)KuwaitKyrgyzstanLuxembourgMalaysiaNetherlandsPolandRussiaSingaporeSwitzerlandTurkeyUkraineUnited KingdomVietnam

United Arab Emirates

BelarusItalyNorth Korea (DPRK)

Pending

EgyptRomaniaUzbekistanLatviaThailand

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© 2011 PwC. All rights reserved. Not for further distribution without the permission of PwC. "PwC" refers to the network of member firms ofPricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each memberfirm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients.PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professionaljudgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it controlthe exercise of another member firm's professional judgment or bind another member firm or PwCIL in any way

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© 2012 PwC. All rights reserved. Not for further distribution without the permission of PwC. "PwC" refers to the network of member firms ofPricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separatelegal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for theacts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible orliable for the acts or omissions of any other member firm nor can it control the exercise of another member firm's professional judgment or bind another member firmor PwCIL in any way.